SEC Investigating Beverage Maker Diaego

The Securities and Exchange Commission is investigating whether Diageo PLC has been shipping excess inventory to distributors in an effort to boost the liquor company's results, according to people familiar with the inquiry.

By sending more cases to distributors than wanted, the British-based owner of Smirnoff and Johnnie Walker would be able to report increased sales and shipments, according to these people.

Diageo on Thursday confirmed to The Wall Street Journal that it received an inquiry from the SEC regarding its distribution in the U.S.

"Diageo is working to respond fully to the SEC's requests for information in this matter," a company spokeswoman said.

Following The Wall Street Journal report on the investigation, Diageo's American depositary receipts fell 5.2% to $113.40 in afternoon trading.

The inquiry coincides with a period of tumult in Diageo's executive ranks. Diageo announced in June that North American President Larry Schwartz would be retiring by the end of the year. Since then, the company also has announced the departures of its chief marketing officer for North America and a president of national accounts in the U.S.

It recently named Deirdre Mahlan, currently chief financial officer, as president of Diageo North America.

The North American region is the largest and most important to Diageo's bottom line. It accounts for about a third of its $17.58 billion in sales and around 45% of operating profit. Volumes decreased 1% last year, but price increases helped sales rise 3% to about $5.34 billion.

Diageo—which reports full-year results next week—has suffered through a period of slumping sales in the U.S., its largest market, with organic net sales dropping to 3% in 2014 from 6% in 2012. The company raised prices under former Chief Executive Paul Walsh, and its U.S. market share has declined every year between 2011 and 2014, according to Exane BNP Paribas.

Diageo's blockbuster Smirnoff brand has struggled as consumers grew tired of flavored vodka. Interest in Captain Morgan also has waned, and the rum isn't one that is palatable as a shot, a trend that has grown in popularity of late. Diageo also lost market share last year in Canadian whisky as its Crown Royal brand adapted to the flavored whiskey trend later than rivals.

In the U.S., liquor producers follow a three-tier system to market. Producers like Diageo ship to wholesalers, who then ship to retailers. Liquor companies can record shipments as sales when they ship them to the wholesaler.

Diageo Chief Executive Ivan Menezes said during a call with analysts in January that the company has shifted its focus from shipments, which reflect sales to distributors, to depletions, which reflect sales from distributors to retailers. He said the company was reducing the level of inventory distributors carry to get "better visibility on customer depletions."

Pernod-Ricard, the world's second-largest publicly traded liquor company, emphasizes depletions during earnings reports and uses that as a benchmark for performance. Brown-Forman Corp., the largest publicly traded U.S. spirits company, measures its volume performance with depletions.

Diageo has about a 20% share of the U.S. spirits market, according to the industry tracking service Impact Databank. It became the market leader after Mr. Menezes's predecessor, Paul Walsh, exited businesses like Burger King and Pillsbury and focused on alcohol, scooping up Seagram Co. brands Captain Morgan and Crown Royal in a $5 billion deal.