(The) market abuse regulation and the quality of analyst reports in korea

Abstract

This study examines the changes in the quality of analyst reports resulted from the market abuse regulation in Korea. To compensate the limitations of the old Capital Market Act, market abuse regulation provision is introduced in the revised Capital Market Act and enforced in July, 2015. Regarding insider trading, it expands the object and the range of market abuse activities by imposing direct monetary penalties. The most important feature is that analysts are included in new objects of regulation as n-th receiver of material information that are unreleased to the public. Prior studies mainly focus on the legal implications of the new regulation and only few studies examines its effects on analysts’ reports. Therefore, this study is motivated to investigate how the market abuse regulation affects analysts’ earnings forecast accuracy, earnings forecast optimism, and stock recommendations optimism. If the regulation works effectively in terms of providing more reliable information to the investors, an increase in earnings forecast accuracy is expected due to the improved information environment as a substitute channel of private information. Meanwhile, decreases in earnings forecast optimism and stock recommendations optimism are anticipated since the regulation preventing having private channels allows analysts to be independent from the target firms when issuing the reports. The empirical evidences show that analysts’ earnings forecast accuracy is increased, however, both of earnings forecast optimism and stock recommendation optimism are increased in the post-regulation period. These findings are robust after the selection bias analysis with the reduced sample and after controlling the endogeneity problem via propensity-score matching analysis.