Did Regulation Fair Disclosure Prevent Selective Disclosure? Evidence from Intraday Trading Volume and Stock Returns

Regulation Fair Disclosure (Reg FD) prohibits managers from releasing material information in non-public forums. Prior research concludes that Reg FD reduced selective disclosure. However, the results of these studies have been called into question due to confounding events, an inability to ensure the disclosure was intended to comply with Reg FD, and an inability to identify the exact timing of the disclosure. We address these limitations and offer new evidence on the effectiveness of Reg FD in eliminating selective disclosure. First, we find a 21% increase in abnormal trading volume in the hour prior to the public release of disclosures designated by managers as relating specifically to Reg FD. Second, this pre-disclosure increase in trading volume is larger when the information is of greater consequence to the market. Finally, stock returns during the trading hour immediately prior to Reg FD filings predict returns during the trading hour immediately after the filings. Additional analysis reveals that corporate insiders and large traders account for approximately 50 percent of the abnormal trading in the hour leading up to Reg FD filings. Overall, our results suggest that, despite Reg FD's goal of providing material information to all investors simultaneously, a subset of investors appear to trade on the information in Reg FD filings before its public release.