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The aim of Regulation Fair Disclosure (Reg FD) is to prohibit selected disclosure and improve the information environment of capital markets. Using a natural experiment from China and applying a difference-in-differences design, we find that Reg FD constrains private communication between firms and analysts but has the unintended consequence of increasing earnings management, which deteriorates accounting information quality. Furthermore, the effect of Reg FD on earnings management is concentrated in firms without public management earnings forecasts (MFs), firms with strong incentives to meet or beat analysts’ targets, and firms with poor corporate governance. Overall, this study sheds light on the effect of Reg FD on the methods that managers use to meet analysts’ expectations and on how this effect varies with underlying firm characteristics.

Unintended consequences of regulation FD: a natural experiment from China