Liu, Zhen (2006): Fair Disclosure and Investor Asymmetric Awareness in Stock Markets.
Download (293kB) | Preview
The US Security and Exchange Commission implemented Regulation Fair Disclosure in 2000, requiring that an issuer must make relevant information disclosed to any investor available to the general public in a fair manner. Focusing on firms that are affected by the regulation, we propose a model that characterizes the behavior of two types of investors\----one professional investor and many small investors\----in the regimes before and after the regulation, i.e., under selective disclosure and fair disclosure. In particular, we introduce the concept of awareness and allow investors to be aware of relevant information symmetrically or asymmetrically.
We show that with symmetric awareness, fair disclosure induces both a low cost of capital and a low cost of information, therefore making the market efficient. Also, the professional investor collects an equal level of information under fair disclosure than under selective disclosure. However when small investors are not fully aware, fair disclosure still induces a low cost of capital but may induce a high cost of information. The professional investor may deliberately collect less information under fair disclosure than under selective disclosure.
With asymmetric awareness, our theory produces predictions that match the empirical findings by Ahmed and Schneible Jr. (2004) and Gomes, Gorton, and Madureira (2006). They find that small and complex firms are negatively affected by the regulation. We also show that fair disclosure improves the welfare of small investors when they are extremely unaware. Such results are not compatible with the standard symmetric awareness assumption.
|Item Type:||MPRA Paper|
|Institution:||Stony Brook University|
|Original Title:||Fair Disclosure and Investor Asymmetric Awareness in Stock Markets|
|Keywords:||Reg FD; Regulation Fair Disclosure; Information Disclosure; Fair Disclosure; Selective Disclosure; Unawareness; Asymmetric Awareness|
|Subjects:||G - Financial Economics > G3 - Corporate Finance and Governance > G38 - Government Policy and Regulation
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design
|Depositing User:||Zhen Liu|
|Date Deposited:||24. Nov 2006|
|Last Modified:||24. Feb 2013 00:37|
Abreu, D. & Brunnermeier, M.K. (2003), 'Bubbles and Crashes', Econometrica 71(1), 173-204.
Agrawal, A.; Chadha, S. & Chen, M.A. (2006), 'Who is Afraid of Reg FD? The Behavior and Performance of Sell-Side Analysts Following the SEC's Fair Disclosure Rules', Journal of Business 79(6).
Ahmed, A.S. & Schneible Jr., R.A. (2004),'Did Regulation Fair Disclosure Level the Playing Field? Evidence from an Analysis of Changes in Trading Volume and Stock Price Reactions to Earnings Announcements', Mays Business School, Texas AM and Texas Christian University. Available at SSRN: http://ssrn.com/abstract=498002 or DOI: 10.2139/ssrn.498002.
Bailey, W.; Li, H.; Mao, C.X. & Zhong, R. (2003), 'Regulation Fair Disclosure and Earnings Information:Market, Analyst, and Corporate Responses', Journal of Finance 58(6), 2487-2514.
Baiman, S. & Verrecchia, R. (1996), 'The Relation Among Capital Markets, Financial Disclosure, Production Efficiency, and Insider Trading', Journal of Accounting Research 34, 1-22.
Bhushan, R. (1989), 'Collection of Information about Publicly Traded Firms: Theory and Evidence', Journal of Accounting & Economics 11, 183-206.
Bhushan, R. (1989), 'Firm Characteristics and Analyst Following', Journal of Accounting & Economics 11(July), 255-274.
Bushee, B.J.; Matsumoto, D.A. & Miller, G.S. (2004), 'Managerial and Investor Responses to Disclosure Regulation: The Case of Reg FD and Conference Calls', The Accounting Review 79(3), 617-643.
Choi, D. (2003),'Korean Experience of Regulation Fair Disclosure', Available at http://www.iosco.org/library/annual conferences/pdf/ac17-8.pdf.
Diamond, D. & Verrecchia, R. (1991), 'Disclosure, Liquidity, and the Cost of Capital', Journal of Finance 46, 1325-1359.
Dye, R.A. (2001), 'An Evaluation of ``Essays on Disclosure'' and the Disclosure Literature in Accounting', Journal of Accounting and Economics 32, 181-235.
Feinberg, Y. (2005),'Games with Incomplete Awareness', unpublished , Graduate School of Business, Stanford University. Available at http://www.stanford.edu/~yossi/OpenGamesUnaware.htm.
Ferreira, E.J. & Smith, S.D. (2006), 'The Effect of Regulation FD on Analysts Recommendations', Financial Analysts Journal 62(3), 44-57.
Francis, J.; Nanda, D. & Wang, X. (2006), 'Re-examining the Effects of Regulation Fair Disclosure Using Foreign Listed Firms to Control for Concurrent Shocks', Journal of Accounting and Economics 41(3), 271-292.
Gabaix, X. & Laibson, D. (2006), 'Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets', Quarterly Journal of Economics 121(2), 505-540.
Gadarowski, C. & Sinha, P. (2005),'On the Efficacy of Regulation Fair Disclosure: Theory & Evidence', Rowan University and Chapman University. Available at SSRN: http://ssrn.com/abstract=877207.
Gomes, A.R.; Gorton, G. & Madureira, L. (2006),'SEC Regulation Fair Disclosure, Information, and the Cost of Capital', AFA 2005 Philadelphia Meetings. The Wharton School, University of Pennsylvania. Available at SSRN: http://ssrn.com/abstract=529162 or DOI: 10.2139/ssrn.529162.
Griffin, P.A.; Lont, D.H. & Segal, B. (2005),'Regulation Fair Disclosure: An Analysis of SEC Enforcement Action', Graduate School of Management, University of California and University of Otago. Available at http://www.business.otago.ac.nz/finc/research/NZFC_06/Papers/RegFD.pdf.
Heflin, F.; Subramanyam, K. & Zhang, Y. (undated),'Stock Return Volatility Before and After Regulation FD', College of Business, Florida State University; Leventhal School of Accounting, University of Southern California; and Columbia University. Available at SSRN: http://ssrn.com/abstract=292879 or DOI: 10.2139/ssrn.292879.
Heflin, F.; Subramanyam, K. & Zhang, Y. (2003), 'Regulation FD and the Financial Information Environment: Early Evidence', Accounting Review 78(1), 1-37.
Heifetz, A.; Meier, M. & Schipper, B.C. (2006), 'Interactive Unawareness', Journal of Economic Theory 130(1), 78-94.
Irani, A.J. (2004), 'The Effect of Regulation Fair Disclosure on the Relevance of Conference Calls to Financial Analysts', Review of Quantitative Finance and Accounting 22(1), 15-28.
Irani, A.J. & Karamanou, I. (2003), 'Regulation Fair Disclosure, Analyst Following and Analyst Forecast Dispersion', Accounting Horizons 17(1), 15-29.
Kawamura, E. (2004), 'Competitive Equilibrium with Unawareness in Economies with Production', Journal of Economic Theory 121, 167-191.
Ke, B.; Petroni, K. & Yu, Y. (2006),'Did Regulation FD Limit Institutional Investors' Ability to Predict the Future? An Analysis of Transient Institutional Investors' Trading Behavior before a Break in a String of Consecutive Earnings Increases', Smeal College of Business Administration, Pennsylvania State University and Graduate School of Management, Michigan State University. Available at SSRN: http://ssrn.com/abstract=715323.
Li, J. (2006),'Information Structures with Unawareness', Unpublished , University of Pennsylvania. Available at http://www.econ.upenn.edu/~jili/.
Malmendier, U.M. & Shanthikumar, D. (2005),'Are Small Investors Naive about Incentives?', (Older version published as NBER Working Paper 10812 and Stanford Research Paper 1867.) Revise and resubmit at the Journal of Financial Economics (3rd round). Available at http://www.econ.berkeley.edu/~ulrike/Papers/.
Milgrom, P. & Weber, R.J. (1982), 'The Value of Information in A Sealed-bid Auction', Journal of Mathematical Economics 10, 105-114.
Modica, S. & Rustichini, A. (1999), 'Unawareness and Partitional Information Structures', Games and Economic Behavior 27, 265-298.
Modica, S.; Rustichini, A. & Tallon, J. (1998), 'Unawareness and bankruptcy: A general equilibrium model', Economic Theory 12, 259-292.
Mohanram, P. & Sunder, S.V. (2006), 'How Has Regulation Fair Disclosure Affected the Functioning of Financial Analysts?', Contemporary Accounting Research 23(2), 491-525.
Sidhu, B.; Smith, T. & Whaley, R.E. (2006),'Regulation Fair Disclosure and the Cost of Adverse Selection', University of New South Wales, The Australian National University, and Vanderbilt University. Available at SSRN: http://ssrn.com/abstract=917850.
Soffer, L.C. & Zhang, H. (2001),' The Role of Security Analysts and its Implications for Regulation FD', University of Illinois at Chicago and University of Hongkong. Available at http://www.fbe.hku.hk/~hzhang/paper.html.
Straser, V. (2002),'Regulation Fair Disclosure and Information Asymmetry', University of Notre Dame. Available at SSRN: http://ssrn.com/abstract=311303 or DOI: 10.2139/ssrn.311303.
Sunder, S.V. (2002),'Investor Access to Conference Call Disclosures: Impact of Regulation Fair Disclosure on Information Asymmetry', AFA 2003 Washington, DC Meetings. School of Management, Yale University. Available at SSRN: http://ssrn.com/abstract=298653 or DOI: 10.2139/ssrn.298653.
Verrecchia, R.E. (2001), 'Essays on disclosure', Journal of Accounting and Economics 32, 97-180.
Zitzewitz, E. (2002),'Regulation Fair Disclosure and the Private Information of Analysts', Graduate School of Business at Stanford University. Available at SSRN: http://ssrn.com/abstract=305219 or DOI: 10.2139/ssrn.305219.
Available Versions of this Item
- Fair Disclosure and Investor Asymmetric Awareness in Stock Markets. (deposited 24. Nov 2006) [Currently Displayed]