In March, the SEC approved NASDAQ’s request to allow listed firms to rely on regulatory filings for public disclosure. This is the latest in a series of moves seeking to allow firms to use any Reg FD-compliant method for disclosures.
Harmonizing regulatory and exchange disclosure requirements offers numerous benefits, including the elimination of duplicate announcements and the reduction of distribution costs. Before changing how releases are distributed, however, companies should consider two possible downsides.
The first is the potential for reduced news dissemination, which has direct implications for a firm’s securities. Research has shown greater dissemination improves stock liquidity and lowers volatility while enhancing a firm’s visibility; it can even lower the cost of capital. Thus, IR departments should be wary of making changes to news distribution that could diminish dissemination.
Press wire services are designed to distribute news to specific audiences and the services can provide assurance it reaches those individuals. Relying on a website, EDGAR, or any other passive intermediary to distribute news does not provide this same guarantee. Investors can suffer from information overload so news visibility is important: one estimate suggests a 20 percent increase in news dissemination reduces stock volatility by 7 percent.
The second concern is the potential for reduced readability. Numerous studies have found the readability of regulatory filings is remarkably low. This is worrisome because news that is more difficult for investors to process is less likely to be read and understood correctly. Investors may interpret regulatory filings less completely or accurately than concise and clearly written press releases.
Moreover, many journalists are faced with intense pressure to produce material rapidly while often lacking the rigorous financial expertise necessary to interpret detailed regulatory filings. Smaller newsrooms and fewer journalists have made press coverage increasingly prized. Packaging news in more complicated filings may reduce a journalist’s inclination to cover a piece of news, leading to less press coverage.
But both of these concerns can be overcome or mitigated. Until the success of using alternate distribution channels can be evaluated, companies should continue to issue press releases for the most significant news they want widely disseminated. If a company chooses to use an alternative mechanism, like a regulatory filing, to distribute news, the same effort that would be expended on creating a clear and easily digestible press release should be applied.
Eugene Soltes is assistant professor of business administration at Harvard Business School
