Which is better, selective disclosure or fair disclosure? The effects of information asymmetry and incentive misalignment

This paper analyzes the selective disclosure and fair disclosure in a persuation game in which there are incentive misalignment and information asymmetry between the manager and investors. The selective dislcosure regime gives the manager the flexibility to choose the fraction of the investors who can receive the information but the fair disclosure regime regulates the manager in the way that she is only allowed to reveal the information or withhold the information to all the investors. I conclude that when the incentive misalignment and information asymmetry are both sufficiently small (great), the manager and investor both prefer the fair disclosure (selective dislcosure) regime. On the other hand, if the information asymmetry and incentive misalignment are intermediate, the manager prefers the selective disclosure regime and the investor prefers the fair disclosure regime, showing the necessity of taking the heterogeneity of firms into consideration when implementing Reg FD. Furthermore, I show that the small investors prefer the fair disclosure regime when the market size of large investors is sufficiently large, showing that the rgulator should pay attention to the conditions under which the small investors will be worse off after the implementation of Reg FD.