Surreal image of Wall Street transforming into a tranquil lake, symbolizing market transparency through regulation.

Is the Stock Market Rigged? Unveiling How Regulations Impact Security Mispricing

Lena Voss in Business & Economy June 2025 • 4 min read.

"Dive into the world of financial regulations and discover how they shape market efficiency and investor confidence. Learn about the impact of Regulation Fair Disclosure (Reg FD), Sarbanes-Oxley Act (SOX), and other key analyst regulations on security mispricing."

The early 2000s marked a turning point for U.S. capital markets. In response to widespread financial scandals and a growing lack of investor confidence, a series of regulations were enacted to strengthen the integrity and transparency of the financial system. These regulations, including Regulation Fair Disclosure (Reg FD), the Sarbanes-Oxley Act (SOX), and other analyst regulations, aimed to curb abusive financial reporting and analyst behavior.

The core goal was to level the playing field for investors by ensuring that everyone had access to the same information. But a critical question remained: Did these regulations actually reduce security mispricing and increase stock market efficiency? In other words, did they achieve their intended purpose?

A deep dive into financial research provides some answers, revealing a significant reduction in short-term stock price continuation following analyst forecast revisions and earnings announcements after the regulations were implemented. This effect was particularly pronounced among firms with higher information uncertainty, where security valuation is expected to be most sensitive to regulatory changes.

Decoding the Regulations: How They Reshaped the Market

Surreal image of Wall Street transforming into a tranquil lake, symbolizing market transparency through regulation.

Between October 2000 and April 2003, a series of landmark regulations were introduced, designed to overhaul the corporate information environment and restore faith in the markets. These included:

These measures sought to:

Regulation Fair Disclosure (Reg FD): Prevented companies from selectively disclosing material non-public information to certain groups, ensuring wider access to critical insights.
NASD Rule 2711 & NYSE Rule 472: Aimed to eliminate conflicts of interest by separating research analysts from investment banking arms within brokerage firms.
Sarbanes-Oxley Act (SOX): Enhanced financial disclosures, demanded greater auditor independence, and increased corporate responsibility and accountability.
Global Research Analyst Settlement & Regulation Analyst Certification: Required brokerage firms to implement structural changes in analyst research and demanded analysts disclose potential conflicts of interest.

These regulations acted as a reset button, influencing everything from managers' voluntary disclosures to the reporting decisions of analysts. The intention was clear: to foster a more transparent and equitable information environment.

The Path Forward: Regulation and a Fairer Market

The debate around corporate disclosure and the impact of regulations is far from over. However, research offers compelling evidence that the regulations examined here have indeed improved the informational efficiency of U.S. capital markets. By enhancing the quality of the corporate information environment, these regulations can benefit investors and promote a fairer, more transparent market for everyone.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: 10.2139/ssrn.2097005, Alternate LINK

Title: Did Regulation Fair Disclosure, Sox, And Other Analyst Regulations Reduce Security Mispricing?

Journal: SSRN Electronic Journal

Publisher: Elsevier BV

Authors: Edward Lee, Norman C. Strong, Zhenmei (Judy) Zhu

Published: 2012-01-01

Everything You Need To Know

What is Regulation Fair Disclosure (Reg FD), and how does it prevent selective information sharing by companies?

Regulation Fair Disclosure, or Reg FD, prevents companies from selectively disclosing material non-public information, ensuring broader access to critical insights for all investors. Before Reg FD, companies could share important information with select analysts or investors, giving them an unfair advantage. This regulation aimed to level the playing field, promoting a more transparent and equitable market. Enforcement of Reg FD means that if a company shares market-moving information, it must do so publicly, usually through a press release or SEC filing. The impact is significant, as it reduces information asymmetry and enhances market efficiency. Further regulations build upon Reg FD such as SOX.

How did the Sarbanes-Oxley Act (SOX) change financial disclosures and corporate accountability in U.S. capital markets?

The Sarbanes-Oxley Act, commonly known as SOX, enhances financial disclosures, demands greater auditor independence, and increases corporate responsibility and accountability. SOX was enacted in response to major accounting scandals. SOX requires companies to establish and maintain internal controls over financial reporting. This helps to ensure the accuracy and reliability of financial statements. SOX has dramatically increased the cost of compliance for companies. SOX builds upon regulations such as Reg FD.

What were the aims of NASD Rule 2711 and NYSE Rule 472 in addressing conflicts of interest within brokerage firms?

NASD Rule 2711 and NYSE Rule 472 aimed to eliminate conflicts of interest by separating research analysts from investment banking arms within brokerage firms. Before these rules, analysts might feel pressured to issue positive ratings to attract or maintain investment banking business. These rules sought to ensure that analysts provide objective and unbiased research, free from the influence of investment banking interests. By separating these functions, the regulations aimed to improve the integrity of research reports and enhance investor confidence. Without such separation, analysts could face pressure to promote stocks that benefit the firm's investment banking clients, potentially misleading investors.

What impact did the Global Research Analyst Settlement and Regulation Analyst Certification have on analyst research and conflict disclosure?

The Global Research Analyst Settlement and Regulation Analyst Certification required brokerage firms to implement structural changes in analyst research and demanded analysts disclose potential conflicts of interest. These measures came about due to concerns about biased research and conflicts of interest among analysts, particularly during the dot-com boom. By requiring disclosure of conflicts, investors can better assess the credibility and objectivity of analysts' recommendations. The settlement also led to the creation of independent research to provide investors with unbiased analysis. These regulations have collectively aimed to foster a more transparent and trustworthy research environment.

In what ways did Regulation Fair Disclosure (Reg FD) and the Sarbanes-Oxley Act (SOX) improve stock market efficiency?

These regulations, including Regulation Fair Disclosure (Reg FD), the Sarbanes-Oxley Act (SOX), NASD Rule 2711 & NYSE Rule 472, Global Research Analyst Settlement & Regulation Analyst Certification are aimed to reduce security mispricing and increase stock market efficiency by enhancing the quality of the corporate information environment. By ensuring fair access to information, promoting auditor independence, and eliminating conflicts of interest, these regulations help to create a more level playing field for investors. This leads to more accurate stock pricing and greater investor confidence, contributing to a fairer and more transparent market. However, it's worth noting that while these regulations have had a positive impact, the debate around corporate disclosure and market fairness is ongoing.