Managers’ Private Communications with Analysts: The Effect of SEC v. Siebel Systems Inc.

Abstract

In 2005, the SEC suffered a high-profile loss in its first court case, SEC v. Siebel Systems Inc., in effort to enforce Regulation Fair Disclosure (Reg FD). We examine the impact of this loss on managers’ selective disclosure to sell-side analysts. Using a variety of tests, we provide evidence that the information content of analyst reports increased after the Siebel decision, especially for observable instances of private meetings. This finding suggests that such selective disclosure increased significantly after the court’s decision. Our results also suggest that the increased selective disclosure faded as the SEC resumed enforcement actions related to Reg FD in 2009. In exploratory analyses, we survey and interview law firm partners to investigate possible mechanisms for our results; their responses suggest that the Siebel outcome reduced manager concern about liability from selective disclosure. Collectively, our results highlight how the anticipated costs of regulatory enforcement affect private information flow from managers to analysts in particular.

Keywords: Corporate Disclosure Regulation, Managers’ Private Communications, SEC Enforcement Threat, Siebel Systems Case, Regulation Fair Disclosure

JEL Classification: M40, M48, K22, K42