What Information Do Firms Hide in Confidential SEC Filings?

• In Event: Voluntary Disclosure - Textual Analysis

Abstract

Publicly traded companies in the United States can request confidential treatment from the Securities and Exchange Commission (SEC) to withhold information from investors that management believes would cause competitive harm if publicly disclosed. Motivated by investor skepticism over managers’ confidential treatment requests and prior research documenting that agency cost motives explain managers’ decisions to withhold presumably proprietary information, we examine the nature of news the SEC approves for confidential treatment. We determine whether redacted information is favorable versus unfavorable based on firms’ time series of contracts with the same counterparty using redacted customer/supplier contracts obtained from the SEC under the Freedom of Information Act. We find that redacted material contracts withhold approximately equal proportions of net favorable versus unfavorable news (38 percent favorable and 37 percent unfavorable) with the remaining contracts redact net neutral news. Net favorable (net unfavorable) redacted contracts predict positive (negative) risk-adjusted returns in the future and are predictably associated with insider trading. However, when net favorable and unfavorable redactions are combined, the results indicate that confidential treatment decisions with respect to material supply chain contracts reflect “no news” on average and suggest that diversified investors are unlikely to be impacted by managers’ decisions to redact favorable versus unfavorable information.

Authors

• Anne Margaret Thompson, University of Illinois-Urbana-Champaign

• Oktay Urcan, University of Illinois-Urbana-Champaign

• Hayoung Yoon, University of Illinois at Urbana-Champaign