Nondisclosure – A Good News Signal?

Abstract

This paper examines the implications of nondisclosure in a setting where there is a credible signal of the proprietary nature of the undisclosed information. Specifically, I investigate market response to firms’ confidential treatment requests (CTRs) to the Securities and Exchange Commission (SEC). The SEC allows firms to redact required disclosures from SEC filings through confidential treatment when the redacted information is proprietary and the redaction is not detrimental to investors. The findings show that the market reacts favorably to the voluntary nondisclosure of proprietary information with CTR redactions. Market reaction is more favorable to the redaction of information that is more likely to have proprietary value, such as information related to research and development. In addition, I find that the redacting firms experience superior accounting performance compared to that of their peers in the years following the redaction, consistent with the market’s response to the redaction. These findings indicate that a firm’s CTR redaction overall serves as a credible signal of the proprietary nature of the withheld information. The results of this study suggest a possible role for a credible signaling channel to facilitate communication between insiders and outsiders regarding the nature of withheld information. This study also has policy implications regarding the recent change in the confidential treatment process that weakens the SEC monitoring on the confidential treatment redacted information.

Keywords: Disclosure; Voluntary Nondisclosure, Redacted Information, Signaling, Proprietary Information, Confidential Treatment Order

JEL Classification: G10, M41