Have analyst forecast properties improved after regulations?

Abstract

Violation of securities laws and corporate scandals led to the passage of Regulation Fair Disclosure and the Sarbanes-Oxley Act, and to the Global Analyst Research Settlement, in early 2000. These regulations were designed to protect investors by reducing analyst conflicts of interest and improving the quality of financial information. As such, these regulations were expected to improve analysts' earnings forecast. This paper examines the trend in accuracy and dispersion of analysts' earnings forecasts over the period 1994-2009 to determine if forecast properties improved following these regulations. Consistent with the evidence provided by many of the earlier studies, we do find that forecast accuracy and dispersion improved during the period immediately after these regulations. This finding supports the notion (although it does not prove) that these regulations achieved their objectives in the short run. However, univariate and multivariate tests over the longer period show that analyst forecast accuracy declined and forecast dispersion significantly increased in subsequent years. The results are robust to alternative measures of our dependent variables, specifications of pre- and post-regulation periods, and sample composition; and imply that these regulations did not collectively improve the information environment despite the reduction in analyst conflicts of interest. The continued problem with the information environment, therefore, seems to be largely due to the quality of financial reports. Also, the difference between short- and long-term results suggest that regulators need to weigh the cost of regulations against both their short- and long-term benefits.