Impact of disclosure regulation on information asymmetry: Case of regulation fair disclosure

This study provides evidence on the impact of the Securities and Exchange Commission's (SEC) Regulation Fair Disclosure (Reg. FD) on information asymmetry. Reg. FD prohibits firms from disclosing “material” information selectively to analysts and institutional investors. The regulation has triggered a debate on mainly three issues: (a) whether use of nonpublic channels for selective disclosure (such as, analyst conference calls) results in information asymmetry among investors, (b) whether prohibiting nonpublic communications is contributing to leveling of information asymmetry among investors, and (c) whether Reg. FD has caused firms to reduce the quality of their public voluntary disclosures. The present study addresses all of these issues. I use a sample of earnings conference calls and classify firms as either, (1) “open” firms, which always held conference calls accessible to all investors; or (2) “restricted” firms, which held conference calls for only analysts and institutional investors in the pre-Reg. FD period. I find that restricted firms faced higher information asymmetry compared to open firms in the pre-Reg. FD period. However, in the post-Reg. FD period the differences in information asymmetry between open and restricted firms do not persist. Taken together it suggests that selective disclosure was causing greater information asymmetry among investors and Reg. FD has contributed to the leveling of such information asymmetry. In additional tests, I do not find evidence that Reg. FD has caused firms to reduce quality of information conveyed in conference calls. The study adds to our understanding of how voluntary and mandated disclosure impact information asymmetry among investors.