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

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  • Armando Gomes
  • Gary Gorton
  • Leonardo Madureira

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10567.

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Date of creation: Jun 2004
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Publication status: published as Gomes, Armando, Gary Gorton and Leonardo Madureira. "SEC Regulation FD, Information, and the Cost of Capital.” Journal of Corporate Finance 13, 2-3 (June 2007): 300-334.
Handle: RePEc:nbr:nberwo:10567

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Cited by:
  1. Augustin Landier & David Thesmar, 2011. "Regulating Systemic Risk through Transparency: Trade-Offs in Making Data Public," NBER Chapters, National Bureau of Economic Research, Inc, in: Risk Topography: Systemic Risk and Macro Modeling, pages 31-44 National Bureau of Economic Research, Inc.
  2. Collver, Charles D., 2007. "Is there less informed trading after regulation fair disclosure?," Journal of Corporate Finance, Elsevier, Elsevier, vol. 13(2-3), pages 270-281, June.
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  4. Hamid Mehran & Rene M. Stulz, 2006. "The Economics of Conflicts of Interest in Financial Institutions," NBER Working Papers 12695, National Bureau of Economic Research, Inc.
  5. Beixin Lin & Rong Yang, 2012. "Does Regulation Fair Disclosure affect analysts’ forecast performance? The case of restructuring firms," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 38(4), pages 495-517, May.
  6. Harold Mulherin, J., 2007. "Measuring the costs and benefits of regulation: Conceptual issues in securities markets," Journal of Corporate Finance, Elsevier, Elsevier, vol. 13(2-3), pages 421-437, June.
  7. Smith, Janet Kiholm, 2007. "Evaluating the boundaries of SEC regulation," Journal of Corporate Finance, Elsevier, Elsevier, vol. 13(2-3), pages 189-194, June.
  8. Ozgur E. Ergungor & Leonardo Madureira & Nandkumar Nayar & Ajai K. Singh, 2011. "Banking relationships and sell-side research," Working Paper, Federal Reserve Bank of Cleveland 1114, Federal Reserve Bank of Cleveland.
  9. Gomes, Armando & Gorton, Gary & Madureira, Leonardo, 2007. "SEC Regulation Fair Disclosure, information, and the cost of capital," Journal of Corporate Finance, Elsevier, Elsevier, vol. 13(2-3), pages 300-334, June.
  10. Richard A. Lambert & Christian Leuz & Robert E. Verrecchia, 2009. "Information Asymmetry, Information Precision, and the Cost of Capital," NBER Working Papers 14881, National Bureau of Economic Research, Inc.
  11. Bethel, Jennifer E., 2007. "Recent changes in disclosure regulation: Description and evidence," Journal of Corporate Finance, Elsevier, Elsevier, vol. 13(2-3), pages 335-342, June.
  12. Marco di Maggio & Marco Pagano, 2012. "Financial Disclosure and Market Transparency with Costly Information Processing," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 323, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 23 Oct 2013.
  13. Guembel, Alexander & Rossetto, Silvia, 2009. "Reputational cheap talk with misunderstanding," Games and Economic Behavior, Elsevier, Elsevier, vol. 67(2), pages 736-744, November.
  14. Duarte, Jefferson & Han, Xi & Harford, Jarrad & Young, Lance, 2008. "Information asymmetry, information dissemination and the effect of regulation FD on the cost of capital," Journal of Financial Economics, Elsevier, Elsevier, vol. 87(1), pages 24-44, January.
  15. Leonardo Fernandez, 2012. "Price Discovery, Investor Distraction and Analyst Recommendations Under Continuous Disclosure Requirements in Australia," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 3.

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