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.
Bibliographical noteWe are grateful to Edward J. Riedl (editor) and two anonymous reviewers for their constructive comments, and to Ling Zhao for her able research assistance. We thank Sean Cao for generously sharing the technological peer pressure data.
Part of the work on this paper was done while Lixin (Nancy) Su was affiliated with Lingnan University, Hong Kong, and Dichu Bao was affiliated with Deakin University, Australia.
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- confidential treatment
- crash risk
- material contracts
- withholding bad news