Regulation Fair Disclosure´s Effects on the Cost of Capital: Financial Innovation or Policy Failure

We theoretically investigate the effects of the adoption of regulation fair disclosure by the U.S. securities and exchange commission. As a kind of financial innovation by American regulators, it was intended to stop the practice of "selective disclosure". But it also caused a significant reallocation of information, resulting in higher cost of capital to small firms, which was taken as policy failure. Through an asset pricing model based on rational expectation equilibrium, the paper shows that the increase of the proportion of public information may lead the increase or decrease of the cost of capital, which depends on specific condition. Because the increase of information level by increase of public information amount may not compensate the decrease of information level by decrease of private information amount and lowering of equilibrium price\´s information transmission effect. Our study suggests that regulation fair disclosure had unintended consequences and that "Information" in financial markets may be more complicated than current finance theory admits.