Ashiq Ali is the Charles and Nancy Davidson Chair in Accounting at the Naveen Jindal School of Management, University of Texas at Dallas; Jill Fisch is the Saul A. Fox Distinguished Professor of Business Law and Co-Director, Institute for Law and Economics at the University of Pennsylvania Law School; and Hoyoun Kyung is an assistant professor at the Trulaske College of Business at the University of Missouri. This post is based on their recent paper.
Corporate disclosure regulation and enforcement attempt to regulate the information publicly-traded corporations disseminate into the market. Although the federal securities laws focus primarily on explicit quantitative disclosures, corporations and corporate officials also make extensive use of implicit communications—qualitative information, tone and non-verbal cues. Thus, it is important to understand the extent to which information is communicated in an implicit manner. One of the key sources of implicit communication is private meetings in which there are only a select few market participants, providing the attendees with an opportunity to observe not just what is said, but how it is said. The scope of potential liability exposure that corporate officials face for such private communications has a critical effect on the effectiveness of corporate disclosure regulations in regulating implicit communications.
In our paper, we examine this issue in the context of Regulation Fair Disclosure (FD), which prohibits publicly-traded companies from disclosing material non-public information selectively. Specifically, we analyze empirically the effect of the federal court’s 2005 decision in SEC v. Siebel Systems on managers’ selective disclosure to financial analysts. Using a variety of tests, we provide evidence consistent with the conclusion that the court’s ruling led to a statistically and economically significant increase in selective disclosure. We posit that the market viewed the Siebel decision as a signal that the SEC could not effectively enforce Regulation FD against corporate officials who privately communicated information through positive or negative language, tone, and non-verbal cues.
