Purpose The Financial Industry Regulatory Authority (FINRA) 2241 Rules were a major attempt by a self-regulatory organization to improve the quality of financial markets. We test the impact of these rules on the quality of the USA markets. Design/methodology/approach We systematically and independently use diligence (probability of analyst’s reliance on non-public information), objectivity (probability that an analyst’s forecast equals its best estimate), quality (exponent of negative of standard deviation of residuals of the analyst forecast regression equation) and the analyst’s ex post normalized accuracy. We use four measures of market efficiency for each stock and each quarter, given by controlled contrasts of halfhour-level absolute idiosyncratic returns to a potentially material event in relevant halfhours following an announcement window containing the event versus absolute abnormal returns in control halfhours (halfhours that are not announcement or relevant halfhours corresponding to any potentially material event in that quarter), where potentially material events are separately identified as a) “key developments” (marked by S&P Global CapitalIQ, event types include earnings, dividends, mergers and acquisitions, buybacks, public offerings, management changes, debt defaults, dividend cancellations, and regulatory agency inquiries, sourced from regulatory filings and news vendors), and b) earnings announcements and revisions, and analyst forecasts and revisions. Findings We find that FINRA 2241's impact on each of ten systematic and objective market quality metrics (indices of diligence, objectivity, quality and accuracy by analysts and analyst firms and six measures of market efficiency) was insignificant. Social implications In this paper, our analyses find that FINRA 2241 was not a success, bringing into question the rationale for the existence of FINRA and self-regulatory organizations in general. Originality/value A systematic and purely objective and independent study of the impact of self-regulation on financial markets has not been done before.
Bhattacharya et al. (Tue,) studied this question.