Does "Level Playing Field" Improve Real Efficiency? A Test Using Disclosure Regulation

Abstract

The SEC promulgated Regulation Fair Disclosure (Reg FD) to establish a "level playing field" for investors through prohibiting the use of selective disclosure. We use Reg FD as a plausibly natural experiment to evaluate links between disclosure, private information production, and real efficiency. We find that the rule has an adverse impact on price informativeness, investment-to-price sensitivity, and firm value -- with stronger effects for firms with greater prior reliance on selective disclosure. Analyst forecast quality also appears to decline following the rule change. Interestingly, the impact of Reg FD on price informativeness and the sensitivity of investment-to-price diminishes over time, while the deterioration in analyst forecasts tends to persist. Collectively, the results highlight unintended consequences of Reg FD in inhibiting private information acquisition and, thereby, the informational feedback from stock prices to real decisions.