42 Pages Posted: 13 Jan 2006
Date Written: December 13, 2005
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: Suggested Citation