The Effect of Regulation FD on Transient Institutional Investors' Trading Behavior

Abstract

We assess the impact of Regulation Fair Disclosure (Reg FD) on the trading behavior of transient institutional investors in the quarter prior to a bad news break in a string of consecutive earnings increases. Bad news breaks are defined as breaks that are by growth firms, preceded by longer strings of consecutive earnings increases, followed by longer strings of consecutive earnings decreases, and associated with larger declines in earnings. Pre–Reg FD transient institutions have abnormal selling of stocks in the quarter immediately preceding a bad news break. This abnormal selling is confined to firms that hold conference calls in the pre–Reg FD period. However, in the post–Reg FD period transient institutions do not exhibit similar abnormal selling of stocks in the quarter before a bad news break. Furthermore, after Reg FD transient institutions allocate less of their stock portfolios to conference call firms relative to non–conference call firms in the quarters prior to a bad news break. These results demonstrate that Reg FD has had an impact on management's selective disclosure behavior and significantly changed the trading behavior of transient institutions.

Regulation fair disclosure and the cost of equity capital

“…Their evidence is consistent with transient, but not nontransient, institutions profiting from trading on private information from management. Second, Ke et al (2008) find that transient institutions no longer can anticipate the break of a string of consecutive earnings increases after Reg FD, consistent with Reg FD eliminating selective disclosure to such institutions. We, thus, adopt three measures of institutional ownership to test Hypothesis 3: residual institutional ownership, residual transient institutional ownership, and residual nontransient institutional ownership.…”

“…Overall, their findings suggest that Reg FD does not have a significant adverse effect on the information communicated through one of the more popular mechanisms: conference calls. Fifth, Ke et al (2008) investigate the impact of Reg FD on the trading behavior of transient institutional investors prior to a bad news break in a string of consecutive earnings increases. Ke et al find that, while transient institutional investors engage in abnormal selling of stocks in the quarter immediately preceding a bad news break in the pre-Reg FD period, they no longer can do so in the post-Reg FD period, consistent with Reg FD precluding transient institutions from receiving selective disclosure of bad news breaks.…”

Financial reporting opacity and informed trading by international institutional investors

“…For example, Ke et al (2008) find that selling prior to breaks in strings of consecutive earnings increases by investors with conference call access to management decreased following the implementation of Regulation FD. Ke et al (2008) attribute this finding to a decrease in privileged access to management. My paper differs from this literature because it focuses on how firms' public disclosures affect the extent of informed trading rather than on the effects of regulating access to inside information.…”

Institutional ownership and conservatism

“…This model uses positive (negative) stock returns to 4 As each institution's Bushee classification is highly stable over time, we follow Ke et al (2008) and assign each institution to a type if the institution is classified as that type in at least half of the years from 1979 to 2005. 5 The CDA/Spectrum database, which contains institutions' quarterly holding data, classifies institutions according to the majority of their assets into five types: bank trust departments (type 1), insurance companies (type 2), investment companies (type 3), independent investment advisors (type 4), and other (type 5).…”