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

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.