Implicit Communication and Enforcement of Corporate Disclosure Regulation

This study examines the challenge of implicit communication -- qualitative statements, tone, and non-verbal cues -- to the effectiveness of enforcing corporate disclosure regulation. We use a Regulation Fair Disclosure (Reg FD) setting, given that the SEC adopted the regulation recognizing that managers can convey non-public information privately not just through explicit quantitative disclosures but also through implicit communication. In a high-profile enforcement action, however, the court focused on a literal examination of the manager's language rather than his positive spin to conclude that the SEC had been “too demanding” in examining the manager's statements and that its enforcement policy was “overly aggressive.” We provide empirical evidence suggesting that selective disclosure from managers to financial analysts increased significantly after the court's ruling. We also report survey responses from 60 securities lawyers with Reg FD expertise which support the proposition that this increase in disclosure is more likely due to an increase in implicit communication than in explicit communication or any other reason. Our results highlight the challenges associated with enforcing corporate disclosure regulation in the context of implicit communication