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Regulation FD and analysts’ vs. investors’ weightings of the cash components of earnings

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  • Lo, May H.
  • Xu, Le (Emily)

Abstract

This paper investigates whether investors’ bias in processing the information contained in the cash components of annual earnings has been reduced, and whether the difference in bias between financial analysts and investors has decreased subsequent to Regulation Fair Disclosure (hereafter, Reg FD). We compare analysts’ and investors’ weightings of the three cash flow components of earnings, defined by Dechow, Richardson, and Sloan (2008), from 1985 to 2008, using historical weightings as benchmarks. Our results show that, in the post Reg FD period, the magnitude of investors’ (analysts’) mis-weightings has decreased (increased), and the differences between analysts’ and investors’ mis-weightings have become smaller. Overall, these results suggest that financial analysts’ information advantages over investors declined after Reg FD took effect, and that investors consequently are less biased in assessing the persistence of the cash flow components of earnings following the implementation of Reg FD.

Suggested Citation

  • Lo, May H. & Xu, Le (Emily), 2013. "Regulation FD and analysts’ vs. investors’ weightings of the cash components of earnings," Research in Accounting Regulation, Elsevier, vol. 25(2), pages 169-184.
    • Handle: RePEc:eee:reacre:v:25:y:2013:i:2:p:169-184
    DOI: 10.1016/j.racreg.2013.08.006
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    Cited by:

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    2. Franzen, Laurel & Meckfessel, Michele & Moehrle, Stephen R. & Reynolds-Moehrle, Jennifer A., 2015. "Developments in accounting regulation: A synthesis and annotated bibliography of evidence and commentary in the 2013 academic literature," Research in Accounting Regulation, Elsevier, vol. 27(2), pages 138-159.
    3. Edmonds, Christopher T. & Edmonds, Jennifer E. & Leece, Ryan D. & Vermeer, Thomas E., 2015. "Do risk management activities impact earnings volatility?," Research in Accounting Regulation, Elsevier, vol. 27(1), pages 66-72.

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