NEW YORK — Earnings surprises have had less impact on stock prices since the Securities and Exchange Commission passed the Fair Disclosure Regulation in 2000, according to Goldman Sachs, New York.
Among other things, Regulation FD bars public companies from selectively disclosing information to certain shareholders or investors. It was passed primarily to level the playing field between institutional and individual investors — previously, companies would often disclose information on earnings in conference calls with a select group of investors.
The Goldman Sachs study, published in the firm's most recent quantitative management report, examined the return patterns of 75 stocks between 1994 and 2004 and their reactions to positive and negative earnings surprises.
The study found that earnings surprises affected share prices most 20 days prior to earnings announcements, usually because of pre-announcements or forecasts by analysts.
Before Reg FD went into effect on Oct. 23, 2000, the average price of the securities went up 1.39% 20 days before the "most positive" earnings surprise, and dropped 1.73% 20 days before the "most negative" earnings event.
After Reg FD, however, investors seemed to show less reaction to the "most positive" earnings surprise — the average price of the stocks went up only 0.48% 20 days before. But investors still reacted strongly to the "most negative" surprises, with the price going down 2.01%.
"The introduction of Regulation FD appears to have resulted in less ‘leakage' of positive earnings surprises prior to the reporting date," said the study.