Investor Relations and Regulation FD

1. Introduction
This paper investigates the effect of Regulation Fair Disclosure (Reg FD) on firms with
an established investor relations (IR) presence at the time of the regulation. The Securities and
Exchange Commission (SEC) implemented Reg FD on October 23, 2000 with the goal of
leveling the informational playing field by prohibiting selective disclosure of material nonpublic
information to security analysts or favored investors. The regulation relates directly to IR
activities within a firm as a major function of IR is to develop close personal relationships with
analysts and institutional investors. Reg FD specifically highlights “investor relations
professionals” in its definition of a “person acting on behalf of the issuer” (Reg FD, 2000).
IR has also grown to a substantial presence among publicly listed firms with 20 – 30% of
publicly listed firms over the last decade employing a professional IR member. Yet the existing
literature reveals little about this professionalized functional area despite its rapid growth within
firms and its relevance to major topics of interest in the accounting and finance literature, such as
disclosure, analyst following, shareholder composition, and stock price characteristics. 1 We
examine how an exogenous shock (Reg FD), which targeted the close relationships at the core of
IR, affected a unique subset of firms with an established IR presence, and how these firms
adapted to the new regulatory environment. This focused setting also provides cross-sectional
evidence on the overall efficacy of Reg FD on a selective group of firms engaged in practices
targeted by the regulation.
We refer to IR as the specialized function within a firm that integrates activities related to
communications with investors and analysts. This role is staffed by professional IR employees,
often senior managers or vice-presidents, who report directly to top management. To capture this
1 An exception is Bushee and Miller (2010) which investigates the role of IR consultants hired by small firms. Their
study finds that smaller firms, after hiring an IR consultant, experience increases in press releases, media coverage,
liquidity, analyst following, and institutional investor ownership.
1