1. SECK BABACAR
M2 EMPIRICAL FINANCE AND ACCOUNTING:
The impact of regulation Fair Disclosure on investors' prior information quality —
Evidence from an analysis of changes in trading volume and stock price reactions to
earnings announcements
In the past, many companies released important information in meetings and conference calls
where shareholders and the general public were excluded. However in order to deal with this
problem of issuers making selective disclosure of material nonpublic information to analysts,
institutional investors or others, but not to the public at large, Securities and Exchange
Commission (SEC) promulgated in August 2000, a rule in an effort to prevent selective
disclosure by public companies to market professionals and certain shareholders. This rule is
called: « Reg FD 1
». In other words, FD was intended to “level” the playing field for all
investors. Despite the positive aspects of this rule, critics have questioned the efficacy of FD
and its potential costs, especially the potential reduction in the quality of firms’ voluntary
disclosures (AIMR 2000, SIA 2000). Indeed, to show the efficacity of the Reg FD, the authors
try to bring an answer to the main following question if FD has reduced information quality
differences across investors before quarterly earnings announcements, by using a model of
trading volume which suggests that differences in investors’ private information prior to a
public announcement will be reflected in volume associated with absolute price changes.
Thus, they made a comparaison between trading volume and absolute abnormal returns
around earnings announcements in post-FD quarters to two distinct sets of pre-FD quarters
respectively. This study were done on a sample of 2,559 firms and find strong evidence of a
decrease in the volume–return relation post-FD indicating that differences in information
quality between investors prior to earnings announcements decreased. This reduction is driven
by small firms and high technology firms while large firms show little impact of FD. In
addition regarding, the impact of FD across firms of different size, they find a decrease in
differential prior precision is most pronounced for the smallest and medium sized firms. There
is no evidence of a decrease in differential prior precision for the largest firms in the post FD
period relative to either pre-FD period because, the information environment of the largest
firms is too rich for FD to have any significant effects on these firms. In the light of our
analysis, the main lesson that we can fire is that while FD has reduced cross-investor
differences in information quality prior to earnings announcements particularly for smaller
1
The Reg FD rule reads as follows: "Whenever an issuer, or any person acting on its behalf, discloses any material nonpublic
information regarding that issuer or its securities to [certain enumerated persons], the issuer shall make public disclosure of
that information... simultaneously, in the case of an intentional disclosure; and... promptly, in the case of a non-intentional
disclosure. Source: investopedia

2. and high tech firms, the regulation hasn’t improved the average quality of investor’s prior
information for any subset of firms