Regulation Fair Disclosure May Increase Analyst Herding, Inhibit Firm Disclosure According to Study by Yale School of Management, Ohio State University & Carnegie Mellon University

May 03, 2005, 01:00 ET from Yale School of Management

    NEW HAVEN, Conn., May 3 /PRNewswire/ -- Regulation Fair Disclosure (FD)
 prohibits U.S. firms from disclosing information to only a select few
 analysts, instead requiring disclosures to the public. Although the Securities
 and Exchange Commission enacted Regulation FD with the aim of improving the
 quality of information reaching the market to help level the playing field
 between investors and analysts, it may have the opposite effect according to a
 new study.
     The study "Unintended Consequences of Regulating Disclosures: The Case of
 Regulation Fair Disclosure" finds that by forcing disclosures to be widely
 disseminated, Regulation FD may unwittingly increase herding behavior, the
 tendency for analysts to quickly converge to a consensus, and consequently
 leave investors less informed and worse off. As a result of this concern,
 firms with investors' priorities in mind may withhold disclosure, and
 therefore, Regulation FD may inhibit the very disclosure it was intended to
     The study was conducted by Brian Mittendorf and Ganapathi Narayanamoorthy
 of the Yale School of Management, Anil Arya of Fisher College of Business at
 Ohio State University, and Jonathan Glover of the Tepper School of Business at
 Carnegie Mellon University. It can be downloaded at:
     The researchers modeled the effects of Regulation FD on analyst
 interactions and the resulting implications for both investors and firms.
 Among the findings: if a firm's disclosure is public, analysts may rationally
 mimic the firm's announcement and ignore their own information. As a result,
 an investor is left with only firm information to guide her decisions.
     The study also finds that private disclosure can delay herding and result
 in an investor having access to more diverse information, despite not having
 direct access to the firm's information. For example, an investor will have
 access to both the information of analysts who were not privy to the firm's
 disclosure and therefore reported their own information, as well as the
 information from analysts who did receive the disclosure.
     "Selective disclosures can have the advantage of staving off herding
 behavior. And while selective disclosures limit investors' access to
 information initially, the postponement of herding may mean investors gain in
 the end," according to Professor Narayanamoorthy.
     Professor Mittendorf concluded, "Though Regulation FD was created with an
 eye on curbing the behavior of financial market miscreants, our research shows
 that the limitations inherent in the regulation may harm firms and analysts
 whose intentions are pure. By fixating on the wrongdoings of a few, Regulation
 FD may be at risk for throwing the baby out with the bath water."

SOURCE Yale School of Management