Did the Siebel Systems Case Limit the SEC's Ability to Enforce Regulation Fair Disclosure?

Abstract

We examine whether a shock to the enforceability of Regulation Fair Disclosure (Reg FD) limited its ability to restrict the flow of private information between managers and investors. Although prior work provides evidence that Reg FD reduced managers' selective disclosure of material information immediately following its promulgation, we posit that private information flows returned as a result of the Securities and Exchange Commission's (SEC's) public enforcement failure in SEC v. Siebel Systems, Inc. Using multiple settings, we find consistent evidence suggesting that Siebel changed the cost-benefit tradeoff for Reg FD compliance and effectively reversed the initial effects of

Managers' private communications with analysts: The effect of SEC v. Siebel Systems, Inc.

“…Our results corroborate a contemporaneous study by Allee et al (2022), who conclude, as do we, that the Siebel decision increased selective disclosure by managers. The Allee et al (2022) paper relies on a different empirical approach, documenting increased informed trading by transient institutional investors after Siebel.…”

“…Our results corroborate a contemporaneous study by Allee et al (2022), who conclude, as do we, that the Siebel decision increased selective disclosure by managers. The Allee et al (2022) paper relies on a different empirical approach, documenting increased informed trading by transient institutional investors after Siebel. Our findings complement theirs in that we show that informativeness of analysts' reports increased significantly after the Siebel decision, especially in the private meeting context, presumably because of an increase in selective disclosure by managers to financial analysts.…”

“…This result is consistent with the notion that disclosing positive information in public increases managers' litigation risk (see, e.g., Cazier et al, 2020; Kothari et al, 2009; Rogers et al, 2011), providing an incentive to communicate positive information in private to analysts, who can then disseminate the good news through their forecasts or recommendations. In the context of investors, Allee et al (2022) conclude that the Siebel decision led to increased selective disclosure of negative information, by showing that after the Siebel decision, there is an increase in transient institutional investors' ability to sell stocks before breaks in a string of earnings increases. Allee et al (2022) also provide evidence that there is an increase in institutional investors' ability to pick stocks in their trades prior to earnings announcements, suggesting that institutions' private information advantage increases after Siebel.…”

“…We explore whether the increase in informed trading by transient institutional investors following the Siebel decision, documented by Allee et al (2022), is driven by an increase in selective disclosure of nonpublic information to analysts, who then privately disclose the information to transient institutional investors. For this purpose, we test whether the increase in the informativeness of analyst outputs after Siebel is more pronounced for firms with higher transient institutional ownership.…”

“…Our findings complement theirs in that we show that informativeness of analysts' reports increased significantly after the Siebel decision, especially in the private meeting context, presumably because of an increase in selective disclosure by managers to financial analysts. Also, Allee et al's (2022) tests explicitly suggest that the increased selective disclosure after the Siebel decision contained negative information. In addition, we provide evidence indicating that the increased selective disclosure after Siebel likely contained positive information, albeit to analysts.…”