Leveling the playing field: financial regulation and disappearing local bias of institutional investors. Unpublished working paper

Abstract – This study examines whether exogenous regulatory shocks induced by Regulation Fair Disclosure and the Sarbanes-Oxley Act reduce the local bias and the local informational advantage of institutional investors. We find that, following regulatory changes, the local bias and local informational advantage of institutional investors around corporate headquarters declines sharply as their selective access to private information is curtailed. The decline in local institutional ownership is more salient among firms that had more opaque information environments prior to the regulatory changes. Even at the aggregate market-level, the degree of informed trading attributed to local investors declines. The local informational advantage of sell-side equity analysts who are more likely to have selective access exhibits a similar declining pattern and disappears in the post-regulation period. In contrast, regulatory changes have minimal impact on the local informational advantage of institutions in economically relevant regions as they are unlikely to have selective access to management. These findings indicate that regulatory changes affected institutional behavior primarily by curtailing their selective access to management rather than adversely affecting their information processing advantages