Enforcement and Disclosure Under Regulation FD: An Empirical Analysis

Abstract

This paper analyzes the impact of FD enforcement by calculating (1) the aggregate market gain to covered investors from access to selective information during the FD violation period and (2) the market response to the SEC enforcement announcement, at which time public investors first learn of an alleged FD violation. We also examine the market response to an untimely FD disclosure filing, which investors with earlier access to the FD event could exploit, possibly in violation of the regulation. Our analysis shows that FD may impose losses on public investors in three ways. First, they may lose because they may not recover the gains to covered investors from selective access ($278 million for the 10 enforcement cases so far). Second, they may lose because the market responds negatively to an SEC enforcement announcement (an average market-adjusted price drop of 6.11 percent over announcement days -1 to 1). Third, they may lose because many registrants file untimely FD disclosures (more than 24 hours late) not subject to earlier public disclosure through a press release. We intend these results to inform regulators and others about the cost and benefits of FD and to complement the existing literature, which thus far has focused on analyst, market, and company responses to FD adoption, and not the effects of FD enforcement or untimely disclosure. We also discuss the literature on analysts’ and investors’ responses around FD adoption, and reason that this evidence supports the view that most registrants disclose the same mix of information as before, despite an increase in conference calls and other disclosures.