Analysts’ Recommendation Revisions and Subsequent Earnings Surprises: Pre- and Post- Regulation FD

42 Pages Posted: 28 May 2011 Last revised: 9 Jul 2011

See all articles by Dan Palmon

Dan Palmon

Rutgers, The State University of New Jersey - Accounting & Information Systems

Ari Yezegel

Bentley University - Department of Accountancy

Date Written: October 24, 2010

Abstract

This study examines the extent to which analyst recommendations were useful in identifying earnings surprises during the pre- and post- Regulation FD periods. A comparative analysis of the association between recommendation revisions and subsequent earnings surprises suggests a significant decline in the predictive value of analysts’ recommendations after Regulation FD took effect. Recommendation revisions are roughly 55 percent less useful in predicting earnings surprises in the post-Regulation FD period. Further, average abnormal return earned by investors following analysts’ advice to exploit earnings surprises is approximately 70 percent less in the post-Regulation FD period. Overall, our findings are consistent with Regulation Fair Disclosure having considerably reduced analysts’ comparative advantage in identifying earnings surprises.

Keywords: Regulation FD, analyst recommendations, earnings surprises and portfolio analysis

JEL Classification: G38, G10, G14

Suggested Citation

Palmon, Dan and Yezegel, Ari, Analysts’ Recommendation Revisions and Subsequent Earnings Surprises: Pre- and Post- Regulation FD (October 24, 2010). Journal of Accounting, Auditing and Finance, Vol. 26, No. 3, 2011, Available at SSRN: https://ssrn.com/abstract=1852753

Dan Palmon

Rutgers, The State University of New Jersey - Accounting & Information Systems ( email )

96 New England Avenue, #18
Summit, NJ 07901-1825
United States
201-648-5472 (Phone)
201-648-1283 (Fax)

Ari Yezegel (Contact Author)

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452
United States
+1.781.891.2264 (Phone)

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