Regulation FD - Explained
What is Regulation Fair Disclosure?
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Table of ContentsWhat is Regulation Fair Disclosure (FD)?What does Regulation FD Require? Academic Research on Regulation FD
What is Regulation Fair Disclosure (FD)?
Regulation Fair Disclosure or Reg FD is a regulation passed by the Securities and Exchange Commission (SEC) of United States for addressing the issue of selective disclosure of information by publicly traded companies and other issuers. The rule passed in August 2000, makes it mandatory for all the publicly-traded companies and issuers of stocks to disclose information about them or their stocks publicly if they intend to disclose that information to a limited group of individuals. That means, if the company wants to share any information about themselves or their stocks with market professionals or certain groups of shareholders, and the information is not already publicly available, they must disclose the information in public simultaneously. If any such information was made public unintendedly, the issuer must act promptly to disclose it in public.
What does Regulation FD Require?
Reg FD aims to ensure full and fair disclosure of information to all. Previously, it was a common practice for many of the companies to disclose information selectively to some investors (usually large institutional investors). The institutional investors could use that market-moving information for trading their securities. Important information was often disclosed in the meetings and conference calls only to the selected investors and perhaps to the analysts. The practice was discriminatory for the general public and small or individual shareholders. The Reg FD is an anti-discriminatory measure taken by the Securities and Exchange Commission to ensure everyone gets to know all the information disclosed by an issuer of securities. Regulation Fair Disclosure doesnt apply to all the communications between an issuer and a shareholder. It is applied to those interactions which are likely to influence the shareholders' trading activity. The rule also applies to all the communications with market professionals and analysts. The senior officials of the issuing company and all other staff engaged in regular communication with the stocks holders and security market professionals are obliged to abide by this regulation. Publicly-traded companies often conduct earning and forecast calls to communicate with the market professionals and update them about the plans and developments. The recordings of those calls must be made available in public after the session ends. The issuer also needs issue press releases simultaneously with the same information. The company may also share the information publicly by filing Form 8-K with the Securities and Exchange Commission.
Academic Research on Regulation FD
- Informational effects of regulation FD: evidence from rating agencies, Jorion, P., Liu, Z., & Shi, C. (2005). Journal of financial economics,76(2), 309-330. This paper examines how the Regulation Fair Disclosure prevents US companies from providing selective nonpublic disclosures to favored investment professionals. However, some few exclusions are available including the disclosure on nonpublic information to credit rating agencies. The paper analyzes the effect of credit rating changes on stock prices.
- Regulation FDand the financial information environment: Early evidence, Heflin, F., Subramanyam, K. R., & Zhang, Y. (2003). The Accounting Review,78(1), 1-37. This article examines if Regulation FD's prohibition of selective disclosure inhibits the flow of financial information to the capital markets before the earnings announcements. However, the article finds no proof that Regulation FD has in any way impaired the availability of information to investors before earnings announcement but finds evidence that suggests it has resulted in improvement.
- The effectiveness of Regulation FD, Gintschel, A., & Markov, S. (2004). Journal of Accounting and Economics,37(3), 293-314. This study investigates if Regulation FD has decreased the informativeness of the information outputs of analysts. It uses a sample of earning forecasts by financial analysts and recommendations released in 2 years around the regulation's effective date to prove that in the post-Regulation FD period, the total price impact of the information released by financial analysts is reduced by 28%.
- How has regulation FDaffected the operations of financial analysts?, Mohanram, P. S., & Sunder, S. V. (2006). Contemporary Accounting Research,23(2), 491-525. The article analyzes how financial analysts generate information, make decisions about firm coverage, and attempt to maintain a forecasting accuracy after the passage of Regulation Fair Disclosure. It employs the use of a specific model which proves that analysts are investing more effort in idiosyncratic information discovery.
- Information asymmetry, information dissemination and the effect ofregulation FDon the cost of capital, Duarte, J., Han, X., Harford, J., & Young, L. (2008). Journal of Financial Economics,87(1), 24-44. This paper examines the impacts of Regulation FD on firms' information environments and costs of capital. It finds that the cost of capital changes are negatively related to both pre-regulation firm size and PIN. It documents the findings regarding Regulation FD and also contributes to a growing literature that documents the linkages between the information environment of firms and their costs of capital.
- The effect of Regulation FD on transient institutional investors' trading behavior, Ke, B., Petroni, K. R., & Yu, Y. (2008). Journal of Accounting Research,46(4), 853-883. This study discusses the impacts of Regulation FD on the trading behavior of transient institutional investors in the quarter before a bad news break in a link of consecutive earnings increases. The results of the study indicate that Regulation FD has had an impact on management's selective disclosure behavior and significantly changes the trading behavior of transient institutions.
- Does Regulation FD work? Evidence from analysts' reliance on public disclosure, Kross, W. J., & Suk, I. (2012). Journal of Accounting and Economics,53(1-2), 225-248. In this paper, an examination is done on how Regulation FD changed the reliance on a firm's public disclosure by analysts. It finds that following public disclosure, the decline in analyst forecast dispersion and forecast error increases after FD. The results indicate that regulation FD levels the ground between analysts and individual investors and hence promotes fair game property of the market.
- An examination of the differential impact ofregulation FDon analysts' forecast accuracy, Findlay, S., & Mathew, P. G. (2006). Financial Review,41(1), 9-31. This article explores the effects of Regulation FD's reducing information disparity across analysts on their forecast accuracy. Proxies for private information lose the power to explain the relative accuracy of analysts after Regulation FD. It finds that the overall analyst forecast accuracy reduces but the analysts that were less accurate before regulation FD improve after its implementation.
- Effect ofregulation FD on asymmetric information, Lee, C. I., Rosenthal, L., & Gleason, K. (2004).Financial Analysts Journal,60(3), 79-89. This paper examines components of the bid-ask spread surrounding new releases and trading activity by retail versus institutional investors before and after the institution of Regulation FD. The results suggest no significant increase after Regulation FD and find little or no increase in the adverse-selection component of bid-ask spreads.
- Regulation FD: A review and synthesis of the academic literature, Koch, A. S., Lefanowicz, C. E., & Robinson, J. R. (2013). Accounting Horizons,27(3), 619-646. This article analyzes the empirical evidence on Regulation FD and determines whether it meets its stated objectives and also to present insights and direction for future research. It finds that FD's prohibition against the selective disclosure of material information takes away the information advantage that is enjoyed by particular investors and analysts and hence provides a level playing field for all the investors.
- Regulation FD and Foreign Issuers: Globalization's Strains and Opportunities, Fox, M. B. (2000). Regulation FD and Foreign Issuers: Globalization's Strains and Opportunities.Va. J. Int'l L.,41, 653. The Regulation FD prevents a public company from selectively disclosing any important nonpublic information about itself or its securities to various people outside the company unless it discloses the information to the whole public. This regulation applies even to foreign companies that operate in the US.