Did Regulation Fair Disclosure Affect Credit Markets?

Abstract

This study assesses whether the implementation of Regulation Fair Disclosure (Reg FD) has affected the quantity and quality of information in credit markets. We find that, after Reg FD, borrowing from new lenders was associated with a higher loan spread and this result remains robust after we control for the endogenity of firms’ choice to switch to new lenders. In addition, we also find that, after Reg FD, (1) borrowers became more dependent on relationship lending; (2) lead lenders retained a higher loan share; and (3) a typical loan syndicate involved a smaller number of participating lenders. All of these results hold robust after we use private firm loans as a control for the effect of the 2001 economic recession. We interpret these results as evidence of an increased level of information asymmetry in credit markets after Reg FD.

Keywords: Regulation Fair Disclosure, Relationship Banking, Information Asymmetry, Cost of Debt, Loan Bid-Ask Spread, Syndication Structure

JEL Classification: G21, G28, D82