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An International Meeting of American Accounting
Association
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Regulation Fair Disclosure and the Cost of Equity Capital |
Zhihong Chen
Hong Kong University of Science and Technology
Dan S. Dhaliwal
University of Arizona
Hong Xie
University of Illinois at Urbana - Champaign
Abstract: Regulation Fair Disclosure (Reg FD) prohibits selective disclosure of material information to a subset of market participants such as analysts and institutional investors without simultaneously disclosing the same information to the investing public. We examine the effect of Reg FD on the cost of equity capital. If Reg FD curtails selective disclosure without adversely affecting the quality and quantity of information dissemination from firms to market participants, the cost of capital should decrease after Reg FD. Using ex ante measures of the cost of equity capital advanced in the recent accounting and finance literature, we find that (1) the cost of capital declines in the post-Reg FD period relative to the pre-Reg FD period for our full sample, (2) the decrease in the cost of capital post Reg FD is mainly due to medium and large firms but is not significant for small firms and (3) the decrease in the cost of capital post Reg FD is systematically related to firm characteristics indicative of selective disclosure before Reg FD. Overall, our findings are consistent with Reg FD having reduced the cost of equity capital.