Griffin et alia on Regulation FD

Regulation Fair Disclosure: An Analysis of SEC Enforcement Actions, by Paul A. Griffin, University of California, Davis - Graduate School of Management, David H. Lont, University of Otago - Department of Accountancy, and Benjamin Segal, INSEAD - Accounting & Control Area, was recently posted on SSRN.  Here is the abstract:

This paper assesses the market impact of the enforcement cases brought by the SEC alleging a violation of Regulation Fair Disclosure (ten so far). Our analysis offers insight into the consequences of FD by estimating the market-adjusted losses suffered by public investors in the violation window and the change in company market value upon SEC announcement. In contrast to total penalties paid by companies or executives of $1.92 million, public investors lost more that $278 million in the violation window, calculated as the reverse of the market-adjusted gains to investors subject to FD (covered investors). We also find that an SEC action associates with an average market-adjusted price drop of 6.11 percent over announcement days -1 to 1. Public investors, therefore, suffer in two ways from an alleged FD violation: first from unfair gains to covered investors and, second, because an FD enforcement action hurts the market value of their shares.

We preface our analysis by discussing the literature on analysts’ and investors’ responses around FD adoption, and reason that this evidence, while varied, supports the view that most registrants disclose the same mix of information as before, despite an increase in conference calls and other disclosures. In contrast to the varied results on FD adoption, we do observe a clear market response to an FD disclosure, primarily on the day of filing, since most issuers file within the 24-hour rule. A significant number, however, miss the deadline. In these situations, our data show elevated trading and a market price response ahead of public disclosure. This suggests that public investors may suffer at the expense of covered investors in a third way, namely, when a registrant posts an untimely FD filing not subject to an enforcement action.