The Differential Informativeness of Positive and Negative Stock Returns

We show negative stock returns reverse more and contain less information on the long-term changes in share prices than positive stock returns mostly on nondisclosure days, and these information differences between negative and positive returns decrease substantially on disclosure days. The results suggest investors are more likely to acquire positive information on nondisclosure days and to obtain both negative and positive information on disclosure days. Accounting conservatism and litigation exposure compels managers to reveal their negative information in disclosures, and if managers withhold negative information, they do it when investors are less likely to find the information on nondisclosure days. Moreover, we use the exogenous imposition of Regulation Fair Disclosure (Reg. FD) to demonstrate that positive information leakage from firms during the quarter is driving the positive slant in investors’ information. Taken together, our results suggest that disclosure plays an important role in the differential informativeness and reversals of positive and negative returns.

The impact of insider trading on analyst coverage and forecasts

Purpose The purpose of this study is to examine the effect of insider trading on analyst coverage and the properties of analyst earnings forecasts. Given the central role of analysts for information diffusion in stock markets, advancing understanding of the role insider trades may play in analyst coverage and forecasts, especially in the context of a changing legal environment (e.g. the implementation of Regulation Fair Disclosure [Reg FD]), should be a worthy goal. Design/methodology/approach To address the research questions, the authors run regressions in which the authors identify and control for as many possible determinants of analyst coverage and forecasts (e.g. firm size, information asymmetry and earnings performance) that are correlated with insider trades. To alleviate endogeneity concerns, the authors use three approaches. First, the authors extend the sample period to the post-Reg-FD period in which managers are not allowed to provide private information to financial analysts. Second, the authors measure analyst coverage in a window that is lagged by insider trades. Third, the authors employ firm-fixed-effects regressions in all the multivariate tests. Finally, following Larcker and Rusticus (2010), the authors conduct the impact threshold for a confounding variable test to assure that all regression analyses are indeed immune to the potential correlated-omitted-variable bias. Findings The authors find that the level of analyst coverage is positively related to the intensity of insider trades and that analyst coverage is more strongly associated with insider purchases than with insider sales. The authors also find that the positive association between analyst coverage and insider trades is less pronounced after the passage of Reg FD. Further investigations reveal that analysts revise their earnings forecasts upward following insider purchases, the informativeness of analyst forecast revisions significantly increases following insider purchases and optimistic bias in analyst forecast revisions is reduced as a result of insider purchases; the authors do not find similar evidence for insider sales. Research limitations/implications A large body of insider trading literature (Johnson et al., 2009; Badertscher et al., 2011; Thevenot 2012; Skaife et al., 2013; Billings and Cedergren 2015; Dechow et al., 2016) provides evidence that insiders actively trade on their private information, such as their foreknowledge of price-relevant corporate events. This literature suggests that insider trades are potentially value-relevant and are informative about a firm’s future prospects. However, less research attention has been paid to investigating how insider trades might affect market participants’ (especially sophisticated participants’) behavior. This study contributes to understanding the role that insider trading may play in shaping analyst behavior. Practical implications Prior research (Frankel and Li, 2004; Lustgarten and Mande, 1995; Carpenter and Remmers, 2001; Seyhun, 1990) maintains that insider sales are less informative about a firm’s future prospects than are insider purchases because insider sales might take place for the liquidity and diversification purposes. By probing the stock price responses to insider selling activities, Lakonishok and Lee (2001), Jeng et al. (2003) and Fidrmuc et al. (2006) infer that insider selling is not informative about future firm performance. However, for such an inference, the authors cannot rule out the possibility that insider sales do convey value-relevant information, but the stock market does not react correctly to such trading information (Beneish and Vargus, 2002). Because the authors focus on examining analysts’ responses to insider sales, and analysts are supposed to be sophisticated in information processing, this study adds more compelling evidence for the notion that insider sales convey less information about a firm’s future prospects than do insider purchases. Social implications There is an ongoing debate about the benefits and drawbacks of insider trading. Opponents of insider trading view insider trades as inequitable and immoral and assert that restricting insider trades curbs resource misallocation and benefits the whole society. Proponents contend that insider trading accelerates the price discovery process, increases market efficiency (Leland, 1992; Bernhardt et al., 1995; Choi et al., 2016) and may even play a role in rewarding and motivating executives (Roulstone, 2003; Denis and Xu, 2013). The authors add to this debate by documenting that insider trading increases the amount of information valuable to analyst research activities and helps enhance analyst services. Originality/value To the best of the authors’ knowledge, this study is the first to offer firm-level evidence of a positive association between insider trades and analyst coverage. By accounting for the post-Reg-FD regime, this paper is also the first to provide evidence on how analysts, in the absence of access to management’s private information because of the regime change by Reg FD, react to insider trades.

Evidence That Analyst Forecasts Do Not Reflect Their Expectations

The results of this article imply that analysts have become better informed about companies’ earnings prospects and have therefore become more accurate in forecasts made well in advance of the reporting period end. However, towards the reporting period end, when investors position themselves to profit from earnings surprise, analysts’ earnings forecasts now deliberately reflect less of their true expectations and have become less accurate. A possible explanation for this development is that as analysts have better and more valuable private information, they have increased incentives to provide select clients with exclusive use of their private information. The implications are that i) an unintended effect of Reg FD may be that less information is now disseminated in financial markets, ii) the decline in hedge fund performance in recent years may be due to the greater uncertainty in determining market expectations, and iii) earnings surprise strategies might be successful again if one could better measure market expectations prior to the earnings announcement.

Priority Dissemination of Public Disclosures

ABSTRACT This study examines the unintended effects of a pre-Reg FD practice that gave a broad group of sophisticated market participants 15-minute earlier access to all corporate press releases than the general public. We find that roughly one-eighth of the price discovery to earnings announcements issued during regular trading hours was due to privileged access to information in earnings press releases, with the 15-minute priority dissemination contributing to just over 50 percent of price discovery from all privileged access. In addition, we find that transient institutions benefited from priority dissemination, especially when the earnings contained good news. Finally, consistent with economic theory, we find that intraday bid-ask spreads decreased post-Reg FD for firms that had sufficient market liquidity to allow trading opportunities during the 15-minute window. Our study has implications for current discussions on whether preferential information distribution by firms and information intermediaries creates an uneven playing field among investors. Data Availability: The data used in this study are available from the public sources identified in the paper JEL Classifications: D82; G14; K22; M45.

Voluntary Disclosures via Social Media and the Role of Comments

ABSTRACT The Securities and Exchange Commission (SEC) has recently expanded the communication channels available for management when it determined that personal social media pages are recognized channels for financial disclosures, provided Reg FD and the 2008 Guidance are correctly applied. However, social media channels are more widely available to investors, both nonprofessional and sophisticated, and allow for interaction between users via postings and comments. The opinions of others, as expressed in their comments on social media, may influence investors' perception of the news in a manner that is beyond that of the traditional disclosures envisioned by the SEC. This research explores this issue by examining the influence of disclosures and attached comments via social media on nonprofessional investors' perceptions of the news, valuation judgments, and perceptions of management's credibility. Grounded in the herding and majority influence theories, the research hypotheses are tested using a between-subjects experimental design. Results indicate that the attached comments shared via social media influence the participants' perceptions and reactions to the news.

Professional Investor Relations within the Firm

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.