Regulatory revelations

Assistant Professor of Accounting Reining Chen explores the unintended effects of recent economic regulations

Reining ChenReining Chen

Reining Chen came to the United States six years ago to pursue a master’s degree in accounting from the University of Michigan, after which she moved on to earn her PhD from the Ohio State University.

Now, here at MIT Sloan, she is an assistant professor of accounting and plans to continue her research on corporate disclosure behavior, accounting information, and the economic effects of regulations.

“My main research interests are in regulations,” she explains. “I am interested in looking at the overall economic consequences of regulations. When a new policy comes out the intention might be good, but sometimes the regulators will only focus on the problem that they want to solve while overlooking other potential areas the rule may affect.”

A deeper look at regulation fair disclosure

Chen’s doctoral thesis took into consideration Regulation Fair Disclosure (or Regulation FD), an SEC ruling implemented in 2000 which mandated that all publicly traded companies disclose material information to all of their investors at the same time. Intended to end selective disclosure, which allowed larger institutional investors to receive important information before others, the rule was seen as an important step toward creating a level playing field in the equity market.

But Professor Chen’s research revealed a number of unintended consequences. “Regulation FD has a differential impact on the equity market and debt market,” she explains. “In the equity market it puts more constraints on corporate disclosure policy, but in the debt market it is not as stringent. So in the debt market, banks do not have to comply, because as long as they hold the information companies disclosed to them in confidence, companies can still privately disclose information to them.” In the long run this means that companies who cannot perfectly replace the private disclosure by public disclosure are more likely to switch to the debt market. And these companies usually are smaller companies.

Chen sees this as just one example of shortsightedness on the behalf of policy makers. And she sees it as part of her job to continue pursuing other overlooked consequences of systemic decisions.

Settling in

“MIT is very welcoming to new faculty,” say Professor Chen. I moved here in September and the accounting department has its own suite. The department is very collegial. If I have a research idea I can just go next door to talk. It is a very friendly environment both in terms of research and in terms of basic daily life.

I am looking forward to my time here at MIT Sloan. I hope the research I am doing can draw some attention from the policy makers and contribute to their decision making in the future.

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