The Economic Consequences of SEC Interpretive Guidance and the Effects on Firm Behavior: Evidence of Non-GAAP Earnings Disclosure

CAAA Annual Conference 2013

American Accounting Association, AAA 2014 Financial Accounting & Reporting Section (FARS) Meeting

Posted: 15 Jan 2013 Last revised: 25 Sep 2018

See all articles by Hangsoo Kyung

Hangsoo Kyung

The Chinese University of Hong Kong

Joseph Weintrop

City University of New York - Baruch College - Stan Ross Department of Accountancy

Date Written: October 10, 2016

Abstract

The U.S. Securities and Exchange Commission (SEC) issued new a Compliance and Disclosure Interpretation (CDI) in 2010, relaxing the stringent enforcement requirements of Regulations G and S-K. In this paper, we investigate whether this new, non-binding, SEC staff interpretation is an economically significant event and whether they allowed for a change in a firm’s voluntary disclosure. Using hand-collected non-GAAP earnings disclosure for S&P500 firms from 2006 to 2013, we find significantly positive 3-days cumulative abnormal returns on the announcement of new CDI announcement only for firms with informative non-GAAP reporters prior to the announcement, suggesting investors anticipate the benefits of relaxed interpretive guidance to be limited to informative non-GAAP reporters and investors view SEC staff interpretations as important regulatory actions that affects managers’ behaviors. We also find that managers more frequently use aggressive non-GAAP reporting in the post-CDI period, especially when managers have incentives to report non-GAAP earnings more aggressively and when the governance system is poor. This paper contributes to the voluntary disclosure and regulation literatures by providing empirical evidence that SEC interpretative guidance is economically important events and effective in shaping firms’ disclosure practices.

Keywords: SEC Interpretive Guidance, Non-GAAP Earning, Non-GAAP Exclusion, Regulation G, Regulation S-K

Suggested Citation

Kyung, Hangsoo and Weintrop, Joseph, The Economic Consequences of SEC Interpretive Guidance and the Effects on Firm Behavior: Evidence of Non-GAAP Earnings Disclosure (October 10, 2016). CAAA Annual Conference 2013. Available at SSRN: https://ssrn.com/abstract=2200733 or http://dx.doi.org/10.2139/ssrn.2200733

Hangsoo Kyung (Contact Author)

The Chinese University of Hong Kong ( email )

School of Accountancy
No.12 Chak Cheung Street
Shatin, New Territorries
Hong Kong
+852-3943-1956 (Phone)

Joseph Weintrop

City University of New York - Baruch College - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
212-802-6443 (Phone)
212-802-6423 (Fax)

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