“Nondisclosure – A good news signal?” by Ms. Kyungran LEE
Ms. Kyungran LEE
PhD Candidate in Accounting
Robert H. Smith School of Business
University of Maryland
I examine the implications of nondisclosure in a setting where there is a credible signal about the proprietary nature of the undisclosed information. Specifically, I investigate the market and analysts' response to firms’ application to the Securities and Exchange Commission (SEC) for a confidential treatment order (CTO), which allows firms to redact required disclosures from SEC filings when the redacted information is proprietary. The CTO process entails a vigorous review and verification by the SEC of management's claims that the redacted information is proprietary. I find that the market and analysts react favorably to the voluntary nondisclosure of proprietary information using the SEC confidential treatment process. This finding indicates that a firm's willingness to submit to the CTO approval process serves as a credible signal of the proprietary nature of the withheld information. Thus, it provides a way for the firm to not only avoid the adverse selection penalty generally associated with nondisclosure but to credibly convey the existence of favorable private information without disclosing such information. Market and analysts reactions are more favorable to the redaction of information that is more likely to have proprietary value, such as information related to research and development. In addition, 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 a credible signaling channel to facilitate communication between insiders and outsiders about the nature of withheld information.