Investor Relations and Regulation FD

Step 1: We estimate a firm’s propensity to have IR using a logit model that regresses the
endogenous choice variable, IR, against a control vector, X, of firm and industry
characteristics as of the fourth quarter 1999.
Step 2: The predicted probabilities from the model are the propensity scores: PR(IR=1 |
X) = P(X). We match each IR firm without replacement to the non-IR firm with the
closest propensity score to form a sample of IR and matched control firms. 7
We analyze how the IR firms’ disclosure, analyst, institutional investor, and information
asymmetry variables evolve over time in the post-Reg FD period (fourth quarter of 2000 to
fourth quarter of 2005) relative to the pre-Reg FD period (fourth quarter of 1999 to third quarter
of 2000). Our main tests focus on the difference-in-difference analysis that compares the
evolution of the IR firms versus the control non-IR firms.
The main limitation of the design is similar to other Reg FD studies – we have only one
event date. The benefit that prior studies gain from a shorter post-Reg FD window is less chance
for economy-wide events. However, major economic events already contaminate even a one year
post-Reg FD window as the regulation was implemented as the same time as the stock market
downturn from the tech-bubble bursting and decimalization came into effect for NYSE/AMEX
firms in 2001. Shorter windows, however, only capture the immediate reaction to the event,
although firm responses may evolve over a longer period. For example, it takes time for firms to
re-evaluate and alter their disclosure policy, and for analysts and institutional investors to make
decisions to modify their relationship with the firm in the new regulatory environment.
Compared to examining the entire population pre- and post-Reg FD, our matched sample design
allows us to create a control sample that is simultaneously experiencing these economy-wide
7 We impose the restriction that the propensity score of the matched firm has to be within 0.25 of the propensity
score of the IR firm and on common support. IR firms without a non-IR match within the 0.25 caliper or not on the
common support are not used.
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