SSRN-Disclosure Standards and Market Efficiency: Evidence from Analysts' Forecasts by Hui Tong

SSRN-Disclosure Standards and Market Efficiency: Evidence from Analysts' Forecasts by Hui Tong:

Short version: increased transparency reduces need (and hence profitability) of analysts. Therefore following increased disclosure rules, the number of analysts falls. Overall the net effect of increased transparency rules is unclear.
The author "examine[s] the effect of transparency by focusing on the interaction between
public information availability and private information acquisition"

With this in mind, Tong examines what happens when countries adopt stricter disclosure requirements that increase transparency. Of course, you know my basic stance that transparency is good. But Tong makes me re-examine that position. My conclusion? Transparency is still good, but increasing transparency is not without its costs.

Longer version: Unintended consequences...often when one thing changes, other things (that at first were seen as unaffected) change as well. This is one danger of static analysis: we might overestimate the benefits of some change.

Hui Toing "examine[s] the effect of transparency by focusing on the interaction between
public information availability and private information acquisition"

Rather than using spreads (a transparency measure used by previous researchers), Tong " considers how international standards affect analysts’ forecasts of listed companies’ earnings, where the accuracy (dispersion) of these forecasts is used as a measure of information accuracy (dispersion)."

Tong finds "that disclosure standards enhance forecast accuracy directly but at the same time reduce the number of analysts per stock (the variable that serves as my proxy for private investments in information). The net effect of disclosure standards on forecast accuracy and dispersion thus ranges from weak to nonexistent"

That is really an important insight! But I maintain that increasing transparency is still good even if dispersion is not significantly increased, this same level is being achieved with fewer analysts (and hence lower costs--of course this assumes that the regulations that increased the transparency are not more costly than the cost of employing the analysts, but that topic will have to wait) .

Suggested Citation

Tong, Hui, "Disclosure Standards and Market Efficiency: Evidence from Analysts' Forecasts" (March 8, 2004). AFA 2005 Philadelphia Meetings. http://ssrn.com/abstract=641842