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Redacted Disclosure

Author

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  • ROBERT E. VERRECCHIA
  • JOSEPH WEBER

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. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2006.

Suggested Citation

  • Robert E. Verrecchia & Joseph Weber, 2006. "Redacted Disclosure," Journal of Accounting Research, Wiley Blackwell, vol. 44(4), pages 791-814, September.
  • Handle: RePEc:bla:joares:v:44:y:2006:i:4:p:791-814
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    Cited by:

    1. Nagar, Neerav, 2016. "Do managers manipulate gross profits? Role of product market competition," IIMA Working Papers WP2016-03-26, Indian Institute of Management Ahmedabad, Research and Publication Department.
    2. Costello, Anna M., 2013. "Mitigating incentive conflicts in inter-firm relationships: Evidence from long-term supply contracts," Journal of Accounting and Economics, Elsevier, vol. 56(1), pages 19-39.
    3. Basil Al-Najjar & Rong Ding, 2014. "Product Market Competition and Corporate Governance Disclosure: Evidence from the UK," Economic Issues Journal Articles, Economic Issues, vol. 19(1), pages 73-94, March.
    4. Núñez-Nickel, Manuel & Gago Rodríguez, Susana, 2010. "Evolutionary model of existing competition and voluntary disclosure," INDEM - Working Paper Business Economic Series id-10-06, Instituto para el Desarrollo Empresarial (INDEM).
    5. Boone, Audra L. & Floros, Ioannis V. & Johnson, Shane A., 2016. "Redacting proprietary information at the initial public offering," Journal of Financial Economics, Elsevier, vol. 120(1), pages 102-123.
    6. Datta, Sudip & Iskandar-Datta, Mai & Singh, Vivek, 2013. "Product market power, industry structure, and corporate earnings management," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3273-3285.
    7. Don Jyh-Fu Jeng & Artur Pak, 2016. "The variable effects of dynamic capability by firm size: the interaction of innovation and marketing capabilities in competitive industries," International Entrepreneurship and Management Journal, Springer, vol. 12(1), pages 115-130, March.
    8. repec:bla:apacel:v:31:y:2017:i:2:p:123-136 is not listed on IDEAS
    9. Petacchi, Reining, 2015. "Information asymmetry and capital structure: Evidence from regulation FD," Journal of Accounting and Economics, Elsevier, vol. 59(2), pages 143-162.
    10. Barakat, Ahmed & Chernobai, Anna & Wahrenburg, Mark, 2014. "Information asymmetry around operational risk announcements," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 152-179.
    11. Ferguson, Andrew & Feigin, Alexey & Kean, Stephen, 2013. "Gold mine feasibility study disclosure in Australia: Determinants and implications," Resources Policy, Elsevier, vol. 38(1), pages 8-17.
    12. Heitzman, Shane & Wasley, Charles & Zimmerman, Jerold, 2010. "The joint effects of materiality thresholds and voluntary disclosure incentives on firms' disclosure decisions," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 109-132, February.
    13. Dedman, Elisabeth & Lennox, Clive, 2009. "Perceived competition, profitability and the withholding of information about sales and the cost of sales," Journal of Accounting and Economics, Elsevier, vol. 48(2-3), pages 210-230, December.
    14. Berger, Philip G., 2011. "Challenges and opportunities in disclosure research—A discussion of ‘the financial reporting environment: Review of the recent literature’," Journal of Accounting and Economics, Elsevier, vol. 51(1), pages 204-218.
    15. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 296-343, December.
    16. Bernard, Darren, 2016. "Is the risk of product market predation a cost of disclosure?," Journal of Accounting and Economics, Elsevier, vol. 62(2), pages 305-325.
    17. Hui, Kai Wai & Klasa, Sandy & Yeung, P. Eric, 2012. "Corporate suppliers and customers and accounting conservatism," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 115-135.
    18. Iatridis, George Emmanuel, 2011. "Accounting disclosures, accounting quality and conditional and unconditional conservatism," International Review of Financial Analysis, Elsevier, vol. 20(2), pages 88-102, April.
    19. Moumen, Néjia & Ben Othman, Hakim & Hussainey, Khaled, 2015. "The value relevance of risk disclosure in annual reports: Evidence from MENA emerging markets," Research in International Business and Finance, Elsevier, vol. 34(C), pages 177-204.
    20. Jannis Bischof & Ulf Brüggemann & Holger Daske, 2012. "Fair Value Reclassifications of Financial Assets during the Financial Crisis," SFB 649 Discussion Papers SFB649DP2012-010, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    21. repec:spr:reaccs:v:22:y:2017:i:4:d:10.1007_s11142-017-9415-1 is not listed on IDEAS
    22. Michael Bradbury & Graeme Dean & Frank L. Clarke, 2009. "Incentives for Non-Disclosure by Corporate Groups," Abacus, Accounting Foundation, University of Sydney, vol. 45(4), pages 429-454.
    23. Ali, Ashiq & Klasa, Sandy & Yeung, Eric, 2014. "Industry concentration and corporate disclosure policy," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 240-264.
    24. Arya, Anil & Mittendorf, Brian, 2007. "The interaction among disclosure, competition between firms, and analyst following," Journal of Accounting and Economics, Elsevier, vol. 43(2-3), pages 321-339, July.

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