Do firms redact information from material contracts to conceal bad news?
Yongtae Kim, Associate Dean and Robert and Barbara McCullough Professor of Accounting
Dichu Bao, Yongtae Kim, Lixin (Nancy) Su; Do Firms Redact Information from Material Contracts to Conceal Bad News?. The Accounting Review 1 September 2022; 97 (5): 29–57. https://doi.org/10.2308/TAR-2020-0255
Abstract
The Securities and Exchange Commission (SEC) allows firms to redact information from material contracts by submitting confidential treatment requests if redacted information is not material and would cause competitive harm upon public disclosure. This study examines whether managers use confidential treatment requests to conceal bad news. We show that confidential treatment requests are positively associated with residual short interest, a proxy for managers' private negative information. This positive association is more pronounced for firms with lower litigation risk, higher executive equity incentives, and lower external monitoring. Confidential treatment requests filed by firms with higher residual short interests are associated with higher stock price crash risk and poorer future performance. Collectively, our results suggest that managers redact information from material contracts to conceal bad news.