Examining The Effects of Regulation Fair Disclosure On Equity Prices

Abstract

In this paper we examine the market reaction to the events that led to the adoption of Regulation Fair Disclosure (FD). The new regulation requires that firms which selectively disclose market-moving information to a select group of analysts and fund managers must make public announcement of that information immediately if the disclosure was intentional and promptly if is was unintentional. The rule has triggered a tremendous amount of debate as opponents raise the concern that the rule will result in a reduction in the amount and quality of information disseminated to the market. The SEC maintains that the rule will result in fairer markets. Our results support the SEC's position. In particular, firms with poor information environments and a greater propensity to selectively disclose information exhibit significantly positive abnormal returns on the first date that major provisions of the expected regulation are made public.