The Economic Impact of SEC Staff Interpretations on Non-GAAP Reporting: Evidence from Compliance and Disclosure Interpretations in 2010

• In Event: Standard Setting and Regulatory Actions

Abstract

The U.S. Securities and Exchange Commission (SEC) issued new Compliance and Disclosure Interpretations (CDI) in 2010, relaxing enforcement of Regulation G and Regulation S-K. The nonbinding nature and opaque procedures behind interpretive guidance cast doubt regarding whether SEC staff interpretive guidance effectively regulates voluntarily disclosed information. In this paper, I empirically examine the economic impact of SEC staff interpretations on non-GAAP earnings disclosure. I find that firms more frequently disclose non-GAAP earnings after the issuance of new CDI, suggesting that nonbinding SEC staff interpretation affects corporate voluntary disclosure practice. Compared to the pre-CDI period, non-GAAP exclusions are of higher quality in the post-CDI period, suggesting that restrictive enforcement of Regulation G might have precluded further improvement of non-GAAP earnings quality. In addition, I find that such a relation exists only when boards are more independent. Consistent with higher non-GAAP exclusions (especially other exclusions) quality in the post-CDI period, the frequency of exceeding analyst forecasts using positive exclusions is lower in the post-CDI period. This paper contributes to the voluntary disclosure and regulation literatures by providing the first empirical evidence that SEC interpretative guidance is effective in shaping firms’ disclosure practices.

Author

• Hangsoo Kyung, Baruch College–CUNY