Does Stricter Disclosure Regulation of Private Meetings Improve the Information Environment? Evidence from Hosting Firms and Mutual Fund Participants

Abstract

Private meetings between management and investors occur worldwide despite laws (such as Regulation Fair Disclosure in the U.S.) that prohibit sharing material private information. Some academics and practitioners have recommended that the existence, timing, and content of these private meetings be disclosed -- presumably because it would improve the information environment and level the playing field among investors.

The Shenzhen Stock Exchange (SZSE) in China is unique worldwide in requiring disclosure of the details of private meetings between firm managers and outside investors. We investigate whether the SZSE’s increased disclosure requirements in July 2012 benefited or harmed the information environment. We use a difference-in-differences design (where possible) and a dataset that includes unaffected Shanghai Stock Exchange (SHSE) firms as a control group. Despite allegedly ‘improved’ disclosures, we find that the SZSE’s information environment degraded relative to pre-July 2012 and relative to SHSE firms – stock price volatility increased and information efficiency declined. After July 2012, private meetings became quasi-public, and disclosures became more positive and less informative. Mutual fund participation in private meetings increased – especially for funds with little or no ownership in the host firm. Increased participation by these less informed institutional investors is one explanation for observed higher stock volatility and lower information efficiency around these meetings.

Keywords: disclosure regulation, private meetings, site visits, mutual funds, stock volatility, information efficiency, information environment

JEL Classification: G14, G15, G18, G28, M48