New research suggests that the Securities and Exchange Commission’s efforts to end selective disclosure has had unintended consequences for the market, hurting small firms most.

The paper by Armando Gomes of the Wharton School, and Gary Gorton and Leonardo Madureira of the University of Pennsylvania empirically investigates the effects of adopting the Regulation Fair Disclosure by the SEC in October 2000. The rule was intended to stop the practice of selective disclosure, in which companies give material information only to a few analysts and institutional investors prior to disclosing it publicly.

The authors say they found that the adoption of the regulation caused “a significant reallocation of information-producing resources, resulting in a welfare loss for small firms, which now face a higher cost of capital.”

They also conclude that the loss of the selective disclosure’ channel for information flows “could not be compensated for via other information transmission channels. This effect was more pronounced for firms communicating complex information and … for those losing analyst coverage.”

“Our results suggest that Reg FD had unintended consequences and that information’ in financial markets may be more complicated than current finance theory admits,” they say.