July 11, 2001
Controversial SEC regulation may be faring well for small investors
The Securities and Exchange Commission’s controversial “Reg FD,” or fair-disclosure regulation, may be closing the gap in fair trading between large and small investors, a University of Washington Business School researcher reports.
Dawn Matsumoto, an assistant professor in accounting, made the discovery after studying earnings reports released through open, rather than closed, conference calls just before passage of the new rule.
The study, by Matsumoto and researchers Brian Bushee of the University of Pennsylvania and Gregory S. Miller of Harvard University, gives important insight into how the regulation has affected investment practices since its adoption by the commission in October 2000.
In the past, companies generally allowed only analysts and selected institutional investors to take part in their conference calls. When those calls were opened to all interested investors, the researchers found the average increase in trades of $10,000 or less was 10 percent compared, to an average 1.4 percent increase in such small trades made during closed calls. The results were presented June 29-30 in Boston at the Journal of Accounting and Economics conference on Accounting and Economics in the New Economy.
“It appears that giving small investors access to the same information made available to analysts in the past levels the playing field between large and small investors,” Matsumoto said.
Before implementing the regulation, the SEC received the highest number of comments in its history regarding the rule intended to curb “selective disclosure.” The regulation, initiated by commission chairman Arthur Levitt, was lauded by investors who claimed that closed calls were unfair and was condemned by most big brokerage firms and fund managers.
The researchers studied the effects of open and closed conference calls from March 1999 to June 2000.
Using samples provided by investment-tracking companies BestCalls.com and First Call Corp., the researchers tracked 1,799 companies that conducted open conference calls related to earnings announcements and 1,475 that conducted closed calls.
The study indicates that giving the public immediate access to information increases price volatility during the time of the conference call. After comparing open calls to closed calls during two separate 24-hour periods, the researchers found that volatility was about 50 percent higher for open calls.
Still, Matsumoto said it is unclear what is causing the increased volatility.
“Whenever more information is disclosed there is an increase in price volatility,” she said. “The increase could be just about timing. All we can say is that greater volatility is consistent with many managers’ concerns that allowing smaller, less savvy investors open access to information could lead to misunderstandings that would lead investors to sell their shares in the company.”
Matsumoto said the study is a reminder to chief financial officers that they need to be careful about how they report information.
“They need to be able to deliver their message appropriately to reach different audiences to avoid misunderstandings,” she said.
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For more information contact Matsumoto at (206) 543-4454 or damatsu@u.washington.edu.
