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April 30, 2003

Survival After the Reg FD Earthquake: Three Years Later, Pros Learn How to Cope

By Nina Mehta

But more work for analysts isn't the only issue. "From the company's perspective what it took away was the ability to work with analysts, on an ongoing basis, to make minor tweaks to their model," said Alex Wellins, a partner of the Blueshirt Group, a San Francisco investor relations firm.

Before Reg FD, if an analyst had an expense number that was higher than the other analysts' number, for example, the company could speak with the analyst during the quarter so that an adjustment could be made. The same approach similarly applied to mid-quarter updates. That type of one-on-one guidance is now forbidden, Wellins says. "As a result, when changes are released they tend to have a more significant overall impact," he added.

Another FD trend raises some concerns. Coca-Cola Co., AT&T Corp. and McDonald's Corp. all announced that they would forego earnings guidance. Although this is not the result solely of Reg FD, the decision is "completely contrary to the spirit of Reg FD," said Wellins. He says it is critical for companies to provide investors with their trends over the coming quarters, however uncertain the overall economic picture.

Mike McDougall, head equities trader at Benson Associates LLC, a buyside firm in Portland, Oregan, that focuses on small-cap value stocks, says that more volume still takes place prior to earnings announcements. This could be because "people know something or are finding out something ahead of everybody else," he said. It could also mean they're simply betting on rumors. Reg FD-related earnings delays are also often interpreted negatively, frequently on a knee-jerk basis.

The lack of information, so the argument goes, increases volatility around earnings releases. That's when news and information suddenly come out. Some of these observations are supported by academic research. "Regulation Fair Disclosure and Earnings Information," a forthcoming article in the Journal of Finance by Warren Bailey of Cornell University and three co-authors, noted "significant increases in trading volume" around earnings releases. But there was no significant change in return volatility after controlling for the effects of decimalization. The additional volume was attributed to greater analyst forecast dispersion.'

The more persistent concern about Reg FD is that it inhibits the flow of information. But FD supporters also point out this stops unfair contacts. "The cozy relationships seem to be over," said Christopher Preston, head of U.S. equity trading in Philadelphia for Gartmore Global Investments. "There are pockets of coziness in investment banking and research, but Reg FD has brought into the limelight the requirement that everybody has to be treated in a fair and equal manner."

So today, almost three years into the FD era, public companies now routinely try to manage meetings. More care is taken not to stray too far from the earnings release in press conferences and at industry events. Companies regulate more stringently the times and situations in which executives and spokespeople make public comments.