The Effect of Corporate Disclosure Regulation on Managers’ Private Communications

The SEC adopted Regulation FD (Reg FD) to address the selective disclosure by issuers of material nonpublic information. Selective disclosure results in information asymmetries that undermine investor confidence in the capital markets. At the same time, Reg FD can chill information disclosure in private meetings between corporate officials and analysts and result in less informed market pricing. Maintaining the balance between effective enforcement and adequate issuer disclosure presents a distinctive regulatory challenge. In the SEC’s first high-profile lawsuit seeking to enforce Reg FD, it failed to persuade the court that Reg FD had been violated in private meetings between managers and analysts. We examine the impact of the court’s ruling on information disclosure and provide empirical evidence suggesting that selective disclosure from managers to financial analysts increased significantly after the decision. We also find that our evidence is likely to be driven by both increased selective disclosure of material information in violation of Reg FD and increased selective disclosure of non-material information within the bounds of Reg FD. In exploratory analyses, we investigate the mechanism responsible for this change by surveying and interviewing law firm partners who advise corporate officials regarding Reg FD compliance. Collectively, our results highlight how the anticipated costs of regulatory enforcement affect information flow in the private meeting context.