Academic journal article The International Journal of Business and Finance Research

The Effect of Regulation Fair Disclosure on Market Integration

Academic journal article The International Journal of Business and Finance Research

The Effect of Regulation Fair Disclosure on Market Integration

Article excerpt


The recent market crises have focused interest on methods to improve the functioning of financial markets. Before implementing new regulations, it is necessary to evaluate the effects of previous regulations. Regulatory changes such as Fair Disclosure have an effect on information dissemination and price discovery. This paper uses the information share of individual markets, to measure changes in the information contribution of markets before and after implementation of Regulation Fair Disclosure. Most of the existing studies focus on the price discovery process and the information contribution or share of the individual markets. This paper uses this information share as a metric to test the effect of a particular regulation. Employing cointegration analysis, this study measures the changes in the information share, impulse response functions, and tests whether Regulation Fair Disclosure has achieved its intended goal of greater informational parity and market integration. Results show that Fair Disclosure has increased the information share of satellite markets and achieved greater market integration.

JEL: G, G12, G14, G18, G19

KEYWORDS: Market Integration, Information Share, Regulation Fair Disclosure, Cointegration, Informational Efficiency, Market Efficiency

(ProQuest: ... denotes formulae omitted.)


Financial capital must be optimally matched with investment opportunity. This would require a financial market, in which informational asymmetries do not impede the allocation process. The parties involved in the supply or consumption of financial capital, usually the latter, may be better informed and reluctant to disclose the superior information. Therefore, the participants would require a market that does not suffer from informational asymmetries and accurately discovers the prices of securities. The accuracy of price discovery reveals how efficiently information is distributed to all participants.

The production and dissemination of information and price discovery are critical to efficient capital markets. Bernier and Mouelhi (2009) in a study that covers the years 2000-7, show that despite the apparent maturity, the Canadian stock market appears to have been inefficient. Financial markets seem to suffer from persistent informational asymmetries and regulations have been imposed in an attempt to correct them. Nevertheless, the very act of imposing regulations raises several questions. Are regulations justified in a free market? Is there a significant imperfection or externality that needs resolution through regulation? How critical is regulation for the development of equitable capital markets? Do we even need regulation? If regulations are necessary, do we adopt a minimalist approach or impose regulations to preempt every possible crisis.

These rules influence the introduction and impounding of new information into prices as well as the dissemination of information through markets in a fundamental way. Thus, any changes to these marketgoverning regulations are bound to have a profound effect on the microstructure of markets and the amount of information that is available to the participants. Edwards (2012) changes in Fed policy interest rates were transmitted into domestic short-term interest rates. An examination of the effect of regulations is particularly relevant in the modem framework where markets have fragmented into a large number of trading venues. Though investors have a greater choice, are the different markets introducing new information and thus contributing to price discovery, or just following a dominant market? Has such proliferation improved price discovery or merely fragmented it? An important, yet less explored line of inquiry is how regulations affect the interactions of various markets and how such effects are manifested in price discovery. This study attempts to at least some of these questions by studying the impact of Regulation Fair Disclosure (Reg FD) on the information share of multiple markets trading the same asset. …

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