The Impact of Regulation Fair Disclosure: Trading Costs and Information Asymmetry

Abstract

In October of 2000, the Securities and Exchange Commission (SEC) passed Regulation Fair Disclosure (FD) in an effort to reduce selective disclosure of material information by firms to analysts and other investment professionals. We find that the information asymmetry reflected in trading costs at earnings announcements has declined after Regulation FD, with the decrease more pronounced for smaller and less liquid stocks. Return volatility around mandatory announcements is also lower but overall information flow is unchanged when mandatory and voluntary announcements are combined. Thus the SEC appears to have diminished the advantage of informed investors, without increasing volatility.

Keywords: Trading Costs, Information Asymmetry, Regulation Fair Disclosure, Return Volatility

JEL Classification: G14, G18