Fair Disclosure and Investor Asymmetric Awareness in Stock Markets

Abstract:     
The U.S. Security and Exchange Commission implemented Regulation Fair Disclosure in 2000. The regulator aims to reduce information asymmetry among investors, and expects public forums to subsume the forbidden information channel of selective forums. We show that even with cooperative managers and effective technology, current public forums is problematic if participants have asymmetric awareness. Namely, when a participant is aware of more uncertainties than are other participants, with zero incentives to share the insights, he would search information privately rather than raising questions in public forums. This causes inefficient information production compared to "unfair'' selective disclosure. Since asymmetric awareness is assumed away in rational expectations models, these models cannot justify the value of insightful questions. Nevertheless, using a standard quote-driven market model, we can compare the effect of the regulation on the price behavior and investors' welfare when awareness is either symmetric or asymmetric, and derive detailed implications. Empirical predictions are presented and they can match some intriguing empirical findings. Finally, we discuss the regulator's consideration on investor awareness.

Number of Pages in PDF File: 30

Keywords: Regulation Fair Disclosure, Information Disclosure, Fair Disclosure, Conference Call, Selective Disclosure, Unawareness, Asymmetric Awareness

JEL Classification: D61, G14, G38, K22, L51, D8, M4

working papers series