The Economic Consequences of SEC Interpretive Guidance and the Effects on Firm Behavior: Evidence of Non-GAAP Earnings Disclosure

The U.S. Securities and Exchange Commission (SEC) issued new a Compliance and Disclosure Interpretation (CDI) in 2010, relaxing the stringent enforcement requirements of Regulations G and S-K. In this paper, we investigate whether this new, non-binding, SEC staff interpretation is an economically significant event and whether they allowed for a change in a firm’s voluntary disclosure. Using hand-collected non-GAAP earnings disclosure for S&P500 firms from 2006 to 2013, we find significantly positive 3-days cumulative abnormal returns on the announcement of new CDI announcement only for firms with informative non-GAAP reporters prior to the announcement, suggesting investors anticipate the benefits of relaxed interpretive guidance to be limited to informative non-GAAP reporters and investors view SEC staff interpretations as important regulatory actions that affects managers’ behaviors. We also find that managers more frequently use aggressive non-GAAP reporting in the post-CDI period, especially when managers have incentives to report non-GAAP earnings more aggressively and when the governance system is poor. This paper contributes to the voluntary disclosure and regulation literatures by providing empirical evidence that SEC interpretative guidance is economically important events and effective in shaping firms’ disclosure practices.