Working Paper: NBER ID: w10567
Authors: Armando Gomes; Gary Gorton; Leonardo Madureira
Abstract: We empirically investigate the effects of the adoption of Regulation Fair Disclosure ( Reg FD') by the U.S. Securities and Exchange Commission in October 2000. This rule was intended to stop the practice of selective disclosure,' in which companies give material information only to a few analysts and institutional investors prior to disclosing it publicly. We find that the adoption of Reg FD caused a significant reallocation of information-producing resources, resulting in a welfare loss for small firms, which now face a higher cost of capital. The loss of the selective disclosure' channel for information flows could not be compensated for via other information transmission channels. This effect was more pronounced for firms communicating complex information and, consistent with the investor recognition hypothesis, for those losing analyst coverage. Moreover, we find no significant relationship of the different responses with litigation risks and agency costs. Our results suggest that Reg FD had unintended consequences and that information' in financial markets may be more complicated than current finance theory admits.
Keywords: Regulation Fair Disclosure; Cost of Capital; Selective Disclosure; Analyst Following
JEL Codes: G10; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reg FD adoption (G38) | reallocation of information-producing resources (D83) |
| reallocation of information-producing resources (D83) | welfare loss for small firms (D69) |
| welfare loss for small firms (D69) | higher cost of capital (G31) |
| loss of selective disclosure channel (G14) | inability to compensate via other information transmission channels (D83) |
| stocks of small firms losing analyst coverage (G24) | significant increases in cost of capital (G32) |
| changes in information production (D83) | measurable impacts on asset prices (G19) |
| costs of producing information (D83) | implications for asset pricing of small firms (G19) |
| Reg FD adoption (G38) | unintended consequences for small firms (L25) |