No disclosure – A good news signal?

• In Event: Earnings, Analyst and Disclosures

Abstract

Disclosure theories predict that investors infer from a manager’s choice not to disclose his private information that the undisclosed information is unfavorable. Consistent with these theories, prior research documents that investors respond negatively when managers refuse to provide requested information during conference calls. A possible exception to the general prediction about how investors respond to nondisclosure is when public disclosure entails proprietary costs. Investors may not penalize nondisclosure when there is credible evidence that proprietary costs are the motive for nondisclosure because investors in this case cannot unambiguously conclude that the undisclosed information is unfavorable. While prior empirical work on the implications of non-disclosure has focused on a setting where managers cannot credibly convey the reason for non-disclosure, I extend the examination to a setting where there is external verification of the proprietary nature of the undisclosed information. Specifically, I investigate the market's response to the Securities and Exchange Commission (SEC)'s grant of Confidential Treatment Order (CTO) status to selected required disclosures in corporate filings. The grant of CTO status allows firms to avoid disclosing certain information that the SEC has deemed to be proprietary.
In contrast to prior research, I show that the market and analysts react favorably to the voluntary nondisclosure of proprietary information when supported by the SEC granted confidential treatment order compared to the full disclosure counterparts. This finding indicates that the SEC's certification of the proprietary nature of the withheld information allows firms to avoid punishment from the stock market for non-disclosure. In fact, certification by the SEC of the proprietary nature of the redacted information serves as a credible signal that the firm is in possession of valuable favorable information. Additionally, there is cross-sectional variation in investors’ perception of the value of redacted information. Reactions are more favorable to the redaction of information that is more likely to be proprietary, such as information related to research and development. Furthermore, I show that the redacting firms experience superior accounting performance to their peers in the years following the redaction, consistent with the market and analysts’ response around the redaction. The results of this study suggest a possible role for an assurance channel to facilitate communication between insiders and outsiders about the value of proprietary information.

Author

• Kyungran Lee, University of Maryland-College Park