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SEC Regulation Fair Disclosure, Information, and the Cost of Capital

43 Pages Posted: 15 Apr 2004  

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

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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.

Keywords: Disclosure, Regulation, Capital Markets, Cost of Capital, Regulation Fair Disclosure, Reg FD, Information Production

JEL Classification: G12, G14, G18, G24, G28, K22

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: https://ssrn.com/abstract=529162 or http://dx.doi.org/10.2139/ssrn.529162

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
3145607087 (Phone)

Gary B. Gorton

Yale School of Management ( email )

165 Whitney Ave
P.O. Box 208200
New haven, CT 06511
United States

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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