SEC Regulation Fair Disclosure, Information and the Cost of Capital



Journal of Corporate Finance, 2-3 ed., vol. 13, pp. 300-334, July (3rd Quarter/Summer) 2007



Regulation FairDisclosure (“Reg FD”), adopted by the U.S. Securities and ExchangeCommission in October 2000 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. Our analysis shows that the adoption ofReg FD caused a significant shift in analyst attention, 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 cross-sectional results suggest that Reg FD had unintended consequences and that “information” in financial markets may be more complicated than current finance theory admits.

Leonardo Madureira

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Weatherhead School of Management
Case Western Reserve University

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Cleveland, Ohio 44106-7235 USA