An Inconsistency in Sec Disclosure Requirements? The Case of the 'Insignificant' Private Target

Abstract

Although the SEC's main charge is to ensure the disclosure of material information, the SEC has not always consistently defined materiality. We show that acquisitions of privately-held targets classified as "insignificant" by the SEC appreciably affect market prices, and therefore are "material" by the SEC's definition. We find significant returns in transactions with targets as small as 2% -- compared with the SEC's disclosure threshold of 20% -- of the acquirer. Further, an average of 19 undisclosed private acquisitions per year exceed the median IPO value in the same year for our sample period. However, because the SEC deems these transactions insignificant, information like target financial statements remains undisclosed to the market. Disclosure rules regarding target financial statements thus create a regulatory disconnect, in which information that is "material" is "insignificant" and therefore not disclosed.

Keywords: Takeover, SEC, disclosure, acquisition, merger

JEL Classification: G34, G38