The recent period has witnessed a spectacular surge of new regulatory initiatives designed to restore trust and to improve the functioning of financial markets. This trend can be observed in many different countries and has touched banks, insurances, credit agencies, stock brokers, financial analysts and professional investment managers. In this project, we analyze the effect of regulations that directly affected stock brokers, investment banks and financial analysts.
The project consists of three papers. The first paper aims to shed new light on the effects of the Market Abuse Directive (MAD), the Transparency Directive (TPD) and the International Financial Reporting Standards (IFRS) on the accuracy of earnings forecasts in Europe. Previous literature shows that local analysts are more accurate because they interpret better the local rules and because they have close ties with local firms. By reducing cross-country differences, the above mentioned regulatory changes allow us to disentangle the relative importance of both sources. The second paper focuses on the U.S. regulation (SOX 501) designed to curb analysts’ conflicts of interest. We investigate whether, in order to circumvent the regulation, affiliated financial analysts switched from favoring their clients to “denigrating” their clients’ rivals. We estimate the extent to which competition exacerbates this practice. The third paper examines whether the market reaction to analysts’ recommendations converged across countries after the enactment of regulations that explicitly forbid the diffusion of private information to selected analysts and require the disclosure of potential conflicts of interest. Previous research has documented four to ten times higher abnormal returns around recommendations in the U.S. compared to other major stock markets. The attribution of this remarkable abnormal reaction to U.S. analysts’ skills is disputable. We explore other potential determinants and test whether past practices related to selective disclosure and conflicts of interest were at the core of these astonishing findings.