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http://ssrn.com/abstract=529162
 
 

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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)

Leonardo Madureira


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

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.

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

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Date posted: April 15, 2004  

Suggested Citation

Gomes, Armando R. and Gorton, Gary B. and Madureira, Leonardo, SEC Regulation Fair Disclosure, Information, and the Cost of Capital. Journal of Corporate Finance, Vol. 13, Nos. 2-3, pp. 300-334, 2007; AFA 2005 Philadelphia Meetings. Available at SSRN: http://ssrn.com/abstract=529162 or http://dx.doi.org/10.2139/ssrn.529162

Contact Information

Armando R. Gomes
Washington University in Saint Louis - John M. Olin Business School ( email )
One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
Gary B. Gorton
Yale School of Management ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203 432-8931 (Fax)
HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Leonardo Madureira (Contact Author)
Case Western Reserve University - Weatherhead School of Management ( email )
364 PBL Building
Cleveland, OH 44106
United States
216-368-5003 (Phone)
HOME PAGE: http://faculty.weatherhead.case.edu/madureira/
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