The Impact of Regulatory Changes on the Information Content of Target Prices
Date Issued
June 11, 2025
Abstract
We document a significant increase in the reliability of target prices following the implementation of
SRO rulings, which were designed to mitigate sell-side analyst conflicts of interest. We test whether
the increase is associated with the implementation of the rules’ provisions (the regulation effect) or the
concurrent migration of most brokerages to three-tier rating systems (the tier effect) by examining
differences in the informativeness, optimism, and accuracy of target prices issued with and without
recommendations and by utilizing periods before and after the date each brokerage changed to the new
tier system. We find evidence in support of the regulation effect but no evidence in support of the tier
effect. Our study contributes to the literature on SRO rulings and can help inform regulators as they
evaluate the efficacy of past rules in improving the functioning of capital markets.
SRO rulings, which were designed to mitigate sell-side analyst conflicts of interest. We test whether
the increase is associated with the implementation of the rules’ provisions (the regulation effect) or the
concurrent migration of most brokerages to three-tier rating systems (the tier effect) by examining
differences in the informativeness, optimism, and accuracy of target prices issued with and without
recommendations and by utilizing periods before and after the date each brokerage changed to the new
tier system. We find evidence in support of the regulation effect but no evidence in support of the tier
effect. Our study contributes to the literature on SRO rulings and can help inform regulators as they
evaluate the efficacy of past rules in improving the functioning of capital markets.
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