Private Earnings Guidance and Its Implications for Disclosure Regulation

This study investigates three related questions: (1) Why did some firms provide private earnings guidance to analysts before Regulation Fair Disclosure? (2) How did the exogenous shock of Regulation Fair Disclosure affect these firms' disclosure policies? (3) What are the economic consequences of this disclosure regulation? To address these questions, I develop a new measure of private earnings guidance. Consistent with theory, I find that firms were more likely to provide private earnings guidance if they had higher proprietary information costs, and if their earnings were more predictive of other firms' earnings. Policymakers enacted Regulation Fair Disclosure to stop private earnings guidance, but they also intended for managers to replace private earnings guidance with public earnings guidance, thereby improving the information environment. However, I find that roughly half of the firms that I classify as relying more on private earnings guidance replace private earnings guidance with non-disclosure instead of public earnings guidance, and as a result, these firms suffer significant deterioration in their information environments. Consistent with theory, firms are more likely to replace private earnings guidance with nondisclosure if they have lower information asymmetry and higher proprietary information costs. On the other hand, firms that replace private earnings guidance with public earnings guidance, on average, prevent significant deterioration in their information environments. Evidence that firms respond to disclosure regulation as predicted by theory can help policymakers anticipate which firms' information environments are likely to be adversely affected by new disclosure regulations.

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Disclosure Frequency, Information Environment, and Cost of Capital under Regulation Fair Disclosure in the Korean Market

Sustainability ◽

10.3390/su12145856 ◽

2020 ◽

Vol 12 (14) ◽

pp. 5856

Author(s):

Hoshik Shim

Keyword(s):

Emerging Markets ◽

Information Asymmetry ◽

Information Leakage ◽

Equity Capital ◽

Information Environment ◽

Price Ratio ◽

Corporate Disclosure ◽

Regulation Fair Disclosure ◽

Fair Disclosure ◽

Korean Market

Disclosure policy contributes to improve sustainable corporate information environment by mitigating information asymmetry surrounding companies. Economic theories generally support that more disclosures reduce the level of information asymmetry, increase stock liquidity, and thus decrease the costs of equity capital. However, the effect of corporate disclosure in emerging markets is not clearly predictable because of the potential information leakage prior to disclosure. Considering this issue, this study focuses on the Regulation Fair Disclosure which prohibits selective disclosure. Using the earnings-to-price ratio as a proxy of the costs of equity, the study finds that disclosure frequency is negatively related to the cost of equity capital. However, I do not find evidence that disclosure is negatively related to the implied costs of equity capital (ICOE). The results of the quintile analysis suggest that this inconsistency is attributable to the better information environment of the ICOE sample. The findings of this study have implications for disclosure regulations in emerging markets, given that the existing literature casts doubt on the effectiveness of corporate disclosure in such markets.

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Information Asymmetry and the Bond Coupon Choice

The Accounting Review ◽

10.2308/accr-51852 ◽

2017 ◽

Vol 93 (2) ◽

pp. 37-59 ◽

Cited By ~ 2

Author(s):

Dan Amiram ◽

Alon Kalay ◽

Avner Kalay ◽

N. Bugra Ozel

Keyword(s):

Information Asymmetry ◽

Regulation Fair Disclosure ◽

Signaling Mechanism ◽

Exogenous Shock ◽

Analyst Coverage ◽

Fair Disclosure ◽

Efficient Contract ◽

Prior Literature

ABSTRACT We examine the role of the coupon choice in bond contracts as a signaling mechanism in the presence of information asymmetry between borrowers and lenders about the credit quality of the borrower. Prior literature focuses on the use of maturity as a signaling mechanism. We conjecture that the coupon is a more effective signaling mechanism. We exploit the enactment of Regulation Fair Disclosure (RegFD) as an exogenous shock to the level of information asymmetry, and employ both bond- and equity market-based variables of information asymmetry to test our conjecture. We find that following the enactment of RegFD, the coupon rates of bonds issued by unrated firms increase relatively more than those of rated firms, consistent with the coupon choice addressing information asymmetry. We fail to find similar increases in maturity. Our inferences remain the same when using the probability of informed trade to measure relative changes in information asymmetry around the enactment of RegFD. We also draw similar conclusions utilizing exogenous drops in analyst coverage that result from brokerage house closures as an alternative quasi-natural experiment. Finally, we provide evidence that the coupon is used more extensively when issuance costs are higher, precisely when maturity is predicted to be a less efficient contract term with which to address information asymmetry. JEL Classifications: G10; G23; M21; M41.

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Determinants of Managerial Earnings Guidance Prior to Regulation Fair Disclosure and Bias in Analysts' Earnings Forecasts

SSRN Electronic Journal ◽

10.2139/ssrn.567441 ◽

2002 ◽

Cited By ~ 7

Author(s):

Amy P. Hutton

Keyword(s):

Earnings Forecasts ◽

Earnings Guidance ◽

Regulation Fair Disclosure ◽

Fair Disclosure

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Professional Investor Relations within the Firm

The Accounting Review ◽

10.2308/accr-50724 ◽

2014 ◽

Vol 89 (4) ◽

pp. 1421-1452 ◽

Cited By ~ 40

Author(s):

Marcus P. Kirk ◽

James D. Vincent

Keyword(s):

Control Sample ◽

Data Availability ◽

Regulatory Environment ◽

Investor Relations ◽

Regulation Fair Disclosure ◽

Differential Impact ◽

Analyst Following ◽

Exogenous Shock ◽

Fair Disclosure ◽

Reg Fd

ABSTRACT: This paper investigates the effect of investments in internal investor relations (IR) departments on firm outcomes. We find that companies initiating internal professional IR experience increases in disclosure, analyst following, institutional investor ownership, liquidity, and market valuation relative to a matched sample of control firms. We also examine the differential impact the exogenous shock of Regulation Fair Disclosure (Reg FD) had on firms with an established professional IR department. We find these IR firms more than doubled their level of public disclosure post-Reg FD. Despite IR firms losing a potential communications channel following Reg FD adoption, we find they did not suffer adversely and instead show a post-Reg FD increase in analyst following, institutional investors, and liquidity relative to a control sample of similar non-IR firms. This implies that the effectiveness of professionalized internal IR increased post-Reg FD consistent with IR firms being relatively better positioned to navigate the more complicated regulatory environment. JEL Classifications: D82; M41; G11; G12; G14; G24 Data Availability: Data are publicly available from the sources identified in the paper with the exception of the membership data from the National Investor Relations Institute, which is a proprietary dataset.

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The Effect of Regulation Fair Disclosure on the Information Environment

SSRN Electronic Journal ◽

10.2139/ssrn.447641 ◽

2003 ◽

Cited By ~ 4

Author(s):

Hadiye Aslan

Keyword(s):

Information Environment ◽

Regulation Fair Disclosure ◽

Fair Disclosure

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Determinants of Managerial Earnings Guidance Prior to Regulation Fair Disclosure and Bias in Analysts' Earnings Forecasts*

Contemporary Accounting Research ◽

10.1506/6qur-cr5m-aqqx-kx1a ◽

2005 ◽

Vol 22 (4) ◽

pp. 867-914 ◽

Cited By ~ 106

Author(s):

Amy P. Hutton

Keyword(s):

Earnings Forecasts ◽

Earnings Guidance ◽

Regulation Fair Disclosure ◽

Fair Disclosure

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The Influence of Disclosure Regulation on Selective Disclosure: Impact on Difficult-to-Measure Reporting Activities and the Importance of Assurance Services

Accounting and the Public Interest ◽

10.2308/api.2006.6.1.70 ◽

2006 ◽

Vol 6 (1) ◽

pp. 70-94 ◽

Cited By ~ 1

Author(s):

Diane J. Janvrin ◽

James M. Kurtenbach

Keyword(s):

Financial Information ◽

Corporate Disclosure ◽

Regulation Fair Disclosure ◽

Disclosure Regulation ◽

The Public ◽

Market Participants ◽

Fair Disclosure ◽

Phone Calls ◽

Assurance Services ◽

Selective Disclosure

The objective of recent disclosure regulation (e.g., Regulation Fair Disclosure [FD]) is to reduce selective disclosure, the practice of releasing financial information to selected users before publicly disclosing the information. Prior to FD, providers used narrow distribution reporting activities, such as phone calls and one-on-one meetings with analysts, reviews of analysts' earnings estimates, and analysts' contracts with suppliers and firm employees, to communicate private financial information to selected users at the expense of uninformed users. Public interest theorists view regulation as a means to protect the public. We predict that if FD is effective, providers will move away from narrow reporting activities and reduce the probability that selected users can achieve a competitive advantage over the general investing public. In addition, assuming that reducing selective disclosure increases the number of market participants receiving information, we argue that the importance of assurance services will increase since FD (1) reduces users' ability to evaluate the credibility of provider information based on personal relationships with providers, and (2) increases the pressure on provider investor relations personnel to monitor the amount and credibility of information disclosed to decrease the likelihood that market participants view the information released as unreliable. Due to the lack of available empirical data related to narrow reporting activities and the importance of assurance services, we employ a field-based questionnaire of providers and users to address these issues. Results indicate that (1) providers and users perceive that narrow distribution reporting activities still exist, and (2) reducing users' personal access to providers may increase the importance of assurance services. The study increases our understanding of how regulation to reduce selective disclosure may protect the public by examining its impact on corporate disclosure activities and policies.

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Redacted disclosure and analysts' weighting of private and public information

10.32469/10355/68954 ◽

2018 ◽

Author(s):

◽

Lei Zhao

Keyword(s):

Initial Public Offerings ◽

Private Information ◽

Public Information ◽

Information Environment ◽

Public Offerings ◽

Proprietary Information ◽

Fair Disclosure ◽

Private And Public ◽

Capital Financing

This paper investigates whether and how redacting proprietary information in regulatory filings affects financial analysts' weighting of private and public information. I examine this issue in the context of initial public offerings (IPO) where firms are allowed to redact value-relevant, proprietary information in relation to material agreements. To the extent that redaction affects firm information environment, I expect redaction to incentivize analysts to overweight their private information relative to public information. As predicted, I find that analysts' overweighting of private information is greater for redacted IPO firms. Moreover, this result prevails particularly when analysts involved rely more on private information. Next, I find analysts' overweighting of private information is more pronounced for analysts who have limited resources, ability, and attention, and when IPO firms do not receive venture capital financing. Finally, I find that the redaction-overweighting relation is attenuated after the passage of Regulation Fair Disclosure. I also find that analysts' overweighting of private information increases redacted IPO firms' idiosyncratic return volatility. Overall, my results extend prior research by examining the role of firm information environment on analysts' decision-making process.

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