Does SEC Interpretive Guidance Affect Firm Behavior? Evidence from non-GAAP Earnings Disclosure

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 interpretations changed a firms' voluntary disclosure. In this paper, I find that firms more frequently disclose non-GAAP earnings after the issuance of new CDI, suggesting that nonbinding SEC staff interpretation influences corporate voluntary disclosure practice as the SEC intended. Compared to the pre-CDI period, non-GAAP exclusions are of higher quality in the post-CDI period, suggesting that excessively restrictive enforcement of Regulation G might have precluded improvement of non-GAAP earnings quality. In addition, I find that such a relation exists among firms with high corporate board independence. Consistent with higher non-GAAP 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 empirical evidence that SEC interpretative guidance is effective in shaping firms' disclosure practices.