Regulation Fair Disclosure and the Cost of Equity Capital
55 Pages Posted: 15 Sep 2006
Date Written: June 15, 2009
We examine the effect of Regulation Fair Disclosure (Reg FD) on the cost of equity capital. We find some evidence that (1) the cost of capital declines in the post-Reg FD period relative to the pre-Reg FD period, on average, for a broad cross-section of U.S. firms, (2) the decrease in the cost of capital post Reg FD is mainly for medium and large firms but is insignificant for small firms, and (3) the decrease in the cost of capital post Reg FD is systematically related to firm characteristics indicative of selective disclosure before Reg FD. In contrast, we find little evidence of a decrease in the cost of capital for American Depositary Receipts and U.S.-listed foreign firms, which are legally exempt from Reg FD. Overall, our findings do not support a conclusion in recent studies that the cost of capital has increased post Reg FD and, if anything, suggest the opposite.
Keywords: Cost of Capital, Selective Disclosure, Information Asymmetry, Regulation Fair Disclosure
JEL Classification: G38, M41, M45
Suggested Citation: Suggested Citation