Is There Less Informed Trading After Regulation Fair Disclosure?

Grant Winner

Dean

Abstract

Prior to 2001, many companies disclosed important information to a privileged group of securities analysts and investment institutions before issuing a public statement. This form of "selective disclosure" put ordinary investors at a distinct disadvantage. Regulation Fair Disclosure was designed by the SEC staff and marketed to the public as a tool to restore public confidence in US securities markets. The SEC passed the regulation on October 10, 2000 and implemented it on October 28, 2000. Since then, firms are required to disclose material information to all market participants at the same time or not at all.

Recent research suggests that Reg FD has resulted in decreased asymmetric information among market participants. However, the research has either relied on highly stylized market microstructure models to discern the level of informed trading, ignored the quarterly earnings announcement time periods, or both. This study seeks to address both concerns. This study presents and defends a bivariate VAR model of stock return and signed stock volume (a raw measure of trade informativeness). A summary informativeness measure, a way to decompose stock price variance, is constructed from the model parameters and residuals. The trade and quote data will be approximately two years of TAQ data – one year before Reg FD and one year after. The model allows for testing of specific hypotheses regarding the impact of Reg FD on the level of informed trading on the NYSE during the earnings announcement period. Additionally, the model allows for a comparison of the price impact of an informed trade before and after the announcement in both the pre and post Reg FD periods.