Not Just What Is Said, but How It Is Said: Implicit Communication and Enforcement of Corporate Disclosure Regulations

This study examines the difficulty of enforcing regulations on corporate disclosure made through implicit communication, such as more or less positive language and non-verbal cues. The SEC brought an enforcement action against Siebel charging that its CFO implicitly communicated non-public material information about the firm in private investor meetings, resulting in the attendees promptly trading the firm’s stock and stock price increasing significantly soon thereafter. The U.S. federal district court dismissed the action noting that the SEC had been “too demanding” in examining the manager’s statements, requiring the precision of a “lexicologist.” I show that after the court’s ruling, selective disclosure of non-public information from managers to financial analysts increased significantly. This finding suggests that enforcing regulations on corporate disclosure made through implicit communication is difficult and this difficulty can significantly limit the effectiveness of the regulations.