Evening the Playing Field for Investors
Regulation Fair Disclosure has curbed selective disclosure of private information in the United States.
Sell Side School Ties
Andrea Frazzini, Christopher J. Malloy, and Lauren H. Cohen
Harvard Business School, Finance Working Paper No. 08-074
Do equity analysts make more positive recommendations on a company’s stock when they share an alma mater with the executives or directors of that company? The data indicates that they did before the U.S. Securities and Exchange Commission passed Regulation Fair Disclosure (FD) in 2000. That regulation prohibits firms from disclosing information selectively — for instance, providing private information to analysts who share a formal or informal alumni network with executives or directors. Before Regulation FD, a portfolio strategy of relying on “buy” recommendations from analysts with school ties to executives would have yielded an 8.16 percent return. After the regulation, however, that return fell to 0 percent. In the U.K., where Regulation FD does not apply, analysts’ educational ties are still strong predictors of their recommendations’ accuracy.
Regulation FD has curbed selective disclosure of private information in the United States. However, in U.K. markets, it is still possible to use analysts’ alumni networks as a proxy for their access to private information.