SEC Regulation Fair Disclosure, Information, and the Cost of Capital
Armando R. Gomes
Washington University in Saint Louis - John M. Olin Business School
Gary B. Gorton
Yale School of Management; National Bureau of Economic Research (NBER)
Case Western Reserve University - Weatherhead School of Management
Journal of Corporate Finance, Vol. 13, Nos. 2-3, pp. 300-334, 2007
AFA 2005 Philadelphia Meetings
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.
Number of Pages in PDF File: 43
Keywords: Disclosure, Regulation, Capital Markets, Cost of Capital, Regulation Fair Disclosure, Reg FD, Information Production
JEL Classification: G12, G14, G18, G24, G28, K22
Date posted: April 15, 2004
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