Did Regulation Fair Disclosure, SOX, and Other Analyst Regulations Reduce Security Mispricing?

Abstract

Between 2000 and 2003 a series of disclosure and analyst regulations curbing abusive financial reporting and analyst behavior were enacted to strengthen the information environment of U.S. capital markets. We investigate whether these regulations reduced security mispricing and increased stock market efficiency. After the regulations, we find a significant reduction in short-term stock price continuation following analyst forecast revisions and earnings announcements. The effect was more pronounced among higher information uncertainty firms, where we expect security valuation to be most sensitive to regulation. Analyst forecast accuracy also improved in these firms, consistent with reduced mispricing being due to an improved corporate information environment following the regulations. Our findings are robust to controls for time trends, trading activity, the financial crisis, analyst coverage, delistings, and changes in information uncertainty proxies. We find no concurrent effect among European firms and a regression discontinuity design supports our identification of a regulatory effect.

Corporate debt maturity and stock price crash risk

“…In firms with weaker governance monitoring mechanisms, managers would be less accountable for not releasing information on a timely basis (Bhojraj & Sengupta, ) or for not providing high‐quality information (Bae, Lim, & Wei, ). Meanwhile, in firms with lower corporate transparency, investors are less able to monitor managerial performance (Bushman & Smith, ) and are more likely to misprice securities (Lee, Strong, & Zhu, ). Furthermore, managers of riskier firms are both more difficult to monitor (Demsetz & Lehn, ) and more likely to conceal unfavorable news to avoid being perceived by investors as taking on excessive risk (Callen & Fang, ).…”

The type of corporate announcements and its implication on trading behaviour

“…My results based on the investigation during the post‐2000 sample period find supportive evidence of delayed trading before the annual announcements as well as Chae's evidence among quarterly announcements. I argue that the implementation of a series of regulations after 2000 has changed the information environment dramatically (Lee et al ., ), which may be one of the reasons that the pre‐announcement total trading volume after 2000 is dominated by delayed trading as selective informed trading may have been largely reduced.…”

“…This finding may be due to the delayed trading behaviour from liquidity traders being outweighed by a large quantity of informed trades prior to Reg FD. It is worthwhile to note that the information environment after 2000 has experienced dramatic changes (Lee et al ., ).…”

Product-market competition, internal control quality and audit opinions. Evidence from Chinese listed firms

“…Auditors reduce the uncertainty of the firm's future judgements, and thus, they are more likely to issue unmodified audit opinions. Arping and Sautner (2013) and Lee et al (2014) conclude that the higher the quality of internal control is, the lower the information asymmetry of the firm. Thus, operating efficiency (Feng, 2015) and investment efficiency (D'Mello et al, 2017) are higher.…”