Did Regulation FD limit institutional investors' ability to predict the future? An analysis of transient institutional investors' trading behavior before a break in a string of consecutive earnings increases

We assess the impact of Reg FD on the trading behavior of transient institutional investors in the quarters prior to a break in a string of consecutive earnings increases. Consistent with Ke and Petroni (2004), we find that pre Reg FD transient institutions can predict, at least one quarter in advance, impending breaks that are considered bad news breaks, i.e., breaks that are longer, preceded by longer strings of consecutive earnings increases, associated with larger declines in earnings, and of growth firms. In addition, transient institutions' predictive ability is mainly confined to firms that held conference calls in the pre Reg FD period (conference call firms). However, in the post Reg FD period we find little evidence that transient institutions have the ability to predict bad news breaks of conference call firms relative to non-conference call firms. Furthermore, transient institutions allocate less of their stock portfolios to conference call firms relative to non-conference call firms in the quarters prior to the break after Reg FD than before Reg FD. These results suggest that Reg FD has been effective in eliminating management's selective disclosure and has significantly changed the trading behavior of transient institutions.