Effects of Regulations and Technology on U.S. Stocks

Abstract

A study of quarterly earnings announcements reveals the dramatic recent effects of regulations and technology on company and stock behavior. Reg FD and Sarbanes-Oxley combined to constrain information flow from company officials to the marketplace. Companies moved away from announcing earnings during market hours and evidently took more time to review quarterly filings, generally announcing later in the quarter. With less information, analysts' EPS predictions became less precise. This resulted in greater surprises once earnings were announced and a doubling of volatility in the stock on the announcement date. Technology also changed the trading of stocks around earnings announcements. The widespread adoption of automated trading software allowed traders to exploit and largely eliminate the long-standing trending of stock prices the day after an earnings announcement.