Did the Siebel Systems Case Limit the SEC's Ability to Enforce Regulation Fair Disclosure?

We examine whether a shock to the enforceability of Regulation Fair Disclosure (Reg FD) limited its ability to restrict the flow of private information between managers and investors. While prior work provides evidence that Reg FD reduced managers’ selective disclosure of material information immediately following its promulgation, we posit that private information flows returned as a result of the SEC’s public enforcement failure in SEC v. Siebel Systems, Inc. Using multiple settings, we find consistent evidence suggesting that Siebel changed the cost-benefit tradeoff for Reg FD compliance and effectively reversed the initial effects of the regulation. We also find that Siebel disrupted the equilibrium of selective disclosure activity, resulting in an unleveling effect among investors with respect to private information advantages. Finally, we find that Siebel also had real effects by altering managers’ capital structure decisions. Our findings run counter to the prevailing “mosaic theory” and gradual learning explanations for private information advantages in the extended post-Reg FD period and highlight the importance of enforcement in achieving intended regulatory outcomes.