Selective access remains, even after 'end' of selective disclosure

Regulation FD – for "fair disclosure" – was meant to have ended the pernicious effects of selective disclosure in the US equity market, but there are signs that the benefits of selective access remain. Investors continue to seek the chance to meet corporate managements and quiz them about their plans, even though executives are under strict orders not to stray from the official story. Regulation FD came into force in the US about a decade ago, one of the reactions to the dot-com bubble, when stocks were being ramped up by investment banks, bought and then dumped by investors-in-the-know. In its aftermath, the authorities in jurisdictions around the world either introduced or tightened their own disclosure obligations to create a new ethos of openness. It led to a wave of webcasting and similar other measure to use technologies to prevent some people learning more than others. Everyone should know all, or at least everything that anyone knew.

So what's happened in the intervening decade? A study by three US scholars has examined the practices surrounding two potential opportunities for selective access, even if they may not confer selective disclosure:

• Conferences: Invitation-only investor conferences, where senior managers present the company's plans and positions.
  
• Roadshows: Formal "offline" meetings that outside of the webcast presentation and CEO attendance at the conference.

"We find significant increases in trade sizes during the hours when firms provide off-line access to investors and after the presentation when the CEO is present," they write. This result is consistent with selective access providing investors with information that they perceive to be valuable enough to trade upon, they conclude. Significant potential trading gains occur over three- to 30-day horizons after the conference for firms providing formal off-line access, suggesting that this selective access is profitable, too. "While we cannot conclusively determine that managers are providing selective disclosure in these off-line settings, our evidence does suggest that selective access to management conveys more benefits to investors than public access even in the post-Reg FD period," they write.

Source documents: A discussion of the findings appears on the Knowledge@Wharton website. The working paper "Do Investors Benefit from Selective Access to Management?," by Brian Bushee of Wharton, Michael Jung of New York University and Gregory Miller of the University of Michigan, is a 53-page pdf file.