Regulation Fair Disclosure and the Cost of Equity Capital

55 Pages Posted: 15 Sep 2006

See all articles by Dan S. Dhaliwal

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Zhihong Chen

Hong Kong University of Science and Technology

Hong Xie

University of Kentucky - Von Allmen School of Accountancy

Date Written: June 15, 2009

Abstract

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

Dhaliwal, Dan S. and Chen, Zhihong and Xie, Hong, Regulation Fair Disclosure and the Cost of Equity Capital (June 15, 2009). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=930724

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Zhihong Chen

Hong Kong University of Science and Technology ( email )

Clear Water Bay
Kowloon
Hong Kong
Hong Kong
(852)-2358-7574 (Phone)
(852)-2358-1693 (Fax)

Hong Xie (Contact Author)

University of Kentucky - Von Allmen School of Accountancy ( email )

Lexington, KY 40506
United States
(859) 257-4648 (Phone)
(859) 257-3654 (Fax)

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