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A Reexamination of Information Flow in Financial Markets: The Impact of Regulation FD and Decimalization

Prem G. Mathew, J. Christopher Hughen and Kent P. Ragan
Quarterly Journal of Business and Economics
Vol. 43, No. 1/2 (Winter - Spring, 2004), pp. 123-147
Published by: Creighton University
Stable URL: http://www.jstor.org/stable/40473378
Page Count: 25
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A Reexamination of Information Flow in Financial Markets: The Impact of Regulation FD and Decimalization
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Abstract

We investigate the impact of Regulation FD on information flow in the equities market. Our analysis indicates that information flow around earnings announcements, proxied by abnormal return volatility around those announcements, of U.S. stocks increased in the first effective quarter of Regulation FD (the fourth quarter of 2000). The information flow of ADRs, which are exempt from Regulation FD, does not change. This supports the inference that Regulation FD, not general market conditions, caused the increase in volatility, but Regulation FD did not have a persistent impact on information flow. A multivariate regression analysis shows that our results are robust to controls that include decimalization, which was implemented concurrently with Regulation FD and has reduced return volatility. Our comparison of return volatilities across firm size indicates that small firms temporarily had larger return volatilities; thus, Regulation FD only temporarily had a differential impact on the information environment of small firms.

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