Firms' Disclosure Policies and Capital Investment Constraints: Evidence from Reg FD

This study examines how a firm?s disclosure policy affects its capital investment constraints. Regulation Fair Disclosure (Reg FD) provides a good framework for testing this relationship. Reg FD was designed to address selective disclosure by creating a level playing field for all market participants. Some firms have chosen to replace selective disclosure with non-disclosure (or silence) regarding the release of material information. I hypothesize that these changes in disclosure policies, arising from the external shock of regulation, can affect firms? capital investment constraints. The results suggest that firms that replace private guidance with silence exhibit higher increases in investment to cash flow sensitivity from pre-FD to post-FD, compared to firms that replace private guidance with public disclosure. This effect is stronger for more financially constrained firms. The results are robust to alternative econometric specifications, different measures of investment and cash flow, different cut-off points for the sample period, and additional control variables.