Externalities of Disclosure Regulation: The Case of Regulation FD

Abstract

We use Regulation Fair Disclosure (REG FD) to examine a relatively neglected but important effect of disclosure regulation: externalities. REG FD applies to all publicly traded U.S. firms, but foreign firms cross-listed on U.S. stock exchanges are explicitly exempt. Despite the exemption, we find that many cross-listed firms voluntarily adopt REG FD as part of their disclosure policies. We hypothesize that REG FD imposes two externalities on cross-listed firms. First, following REG FD previously disadvantaged U.S. investors have a lower demand for shares of cross-listed firms that continue to follow a selective disclosure policy. Second, REG FD creates an information spillover effect on cross-listed firms whose values and cash flows are correlated with those of U.S. firms. We find evidence of both effects in cross-listed firms’ voluntary REG FD adoption decisions. Further, relative to non-adopters, cross-listed firms who voluntarily adopt REG FD exhibit a significant reduction in the information asymmetry component of cost of capital. REG FD adopters are also more likely than non-adopters to switch to open disclosure post REG FD. These results suggest that cross-listed firms’ voluntary REG FD adoption represents a credible commitment to increased disclosure transparency.