Redacted Disclosure

42 Pages Posted: 13 Jan 2006

See all articles by Joseph Weber

Joseph Weber

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Robert E. Verrecchia

University of Pennsylvania - Accounting Department

Date Written: December 13, 2005

Abstract

In this paper we investigate a firm's decision to redact proprietary information from its material contract filings. Information redaction results when the Security and Exchange Commission (SEC) grants a firm's request to withhold information from investors in its material contract filings, presumably because the information is proprietary. We hypothesize that when firms redact information, measures of adverse selection deteriorate. That is, the redaction of proprietary information from material contracts should be associated with: a larger adverse selection component of the bid-ask spread; reductions in market depth; and lower market turnover. In addition, we conjecture that the decision to redact depends on whether the firm plans on raising capital, the competitiveness of the firm's industry, and the performance of the firm. Overall the results of our analysis generally support our predictions. We find that when firms redact information, contemporaneous measures of the adverse selection component of the bid-ask spread rise, and market depth and share turnover deteriorate; this suggests an increase in adverse selection. We also find firms are less likely to redact when they issue long term debt, and are more likely to redact when they are in a competitive industry or experience losses.

Keywords: disclosure, cost of capital, bid ask spread, share turnover, depth

JEL Classification: M41, M45, G32, G38

Suggested Citation

Weber, Joseph Peter and Verrecchia, Robert E., Redacted Disclosure (December 13, 2005). Available at SSRN: https://ssrn.com/abstract=875888 or http://dx.doi.org/10.2139/ssrn.875888

Joseph Peter Weber (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States
617-253-4310 (Phone)

Robert E. Verrecchia

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-6976 (Phone)
215-573-2054 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
630
rank
40,287
Abstract Views
3,175
PlumX Metrics
!

Under construction: SSRN citations while be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information