Regulation Fair Disclosure and the Credibility of Underwriter Analyst Recommendations

Regulation Fair Disclosure (RegFD) prohibits selective disclosure of material non-public information by public companies to privileged individuals (such as favored research analysts or, in general, securities markets professionals) and requires broad, non-exclusionary disclosure of such information. We examine firms' stock price reactions to investment recommendation changes from two distinct groups of analysts around the passage of RegFD. We find that RegFD has had a significant impact regardless of whether recommendation changes were announced by affiliated analysts (those who are affiliated with investment banks that underwrite securities for companies) or unaffiliated analysts. Further, the results suggest that investors reacted more significantly to recommendation changes by affiliated analysts than to those by unaffiliated analysts prior to the implementation of RegFD. However, these significant differences are not present after the passage of RegFD