Implicit Communications and Enforcement of Corporate Disclosure Regulation

Abstract

The communication of non-public information in private meetings between corporate officials and financial analysts presents a distinctive regulatory challenge. One reason is that there typically is no record of what transpires in a private meeting. A second is that information may be communicated both explicitly and through implicit communication -- qualitative statements, tone, and non-verbal cues. The private meeting context is particularly conducive to the use of implicit communication. The SEC adopted Regulation Fair Disclosure (Reg FD) specifically to address selective disclosures in private meetings, but subsequently a federal court rejected the SEC’s attempt to impose liability for optimistic statements by a corporate official in private meetings with investors that contrasted with the negative tone of the company’s public statements. We provide empirical evidence examining the information content of analyst reports before and after the court’s ruling and suggesting that selective disclosure from managers to financial analysts increased significantly. To explore the mechanism responsible for this change, we survey securities lawyers who advise corporate officials regarding Reg FD compliance. Our survey responses indicate that this increase in disclosure is most likely due to an increase in implicit communication. Our results highlight the challenges associated with enforcing corporate disclosure regulation in the context of implicit communication.