Changes in analyst following for less covered firms accompanying Regulation Fair Disclosure: the roles of ability and industry experience

We examine how Regulation Fair Disclosure (Reg FD) affects the decisions of analysts with various levels of ability and industry experience to add or drop less covered firms (LCFs), which are followed by only a few analysts. We use the analysts who continue to follow the same LCFs after Reg FD was implemented as a comparison group to explore the differences in the forecast properties of analysts who add LCFs and those who drop LCFs. We find that, after the implementation of Reg FD, analysts with greater ability or more industry experience are more likely to follow an LCF, and analysts with less ability are more likely to drop coverage of an LCF. In addition, we propose that analysts who add LCFs provide more accurate forecasts and are more likely to issue long-term forecasts. Moreover, compared with analysts who continue to cover the same LCFs, the analysts who drop coverage of LCFs issue more optimistic forecasts for LCFs in the pre-Reg FD period.