Mandatory Disclosure and Acquisition : Evidence From Material Contract Redactions

We examine the unstudied role of mandatory disclosure of material contract information in the corporate control market. Using redactions in SEC filings, which permit firms to restrict otherwise mandatorily disclosed proprietary information to protect their product markets, we find that firms redact more when they face a higher likelihood of takeover. This finding is consistent with the acquisition theory that firms can successfully “sell” their innovation to potential acquirers by protecting their monopoly rents from rivals. Redaction firms in turn face a higher likelihood of takeover compared to their propensity-score matched non-redaction counterparts. Consistent with targets signaling proprietary information through redaction, successful acquisitions also associate with higher target and acquirer merger announcement returns and higher post-acquisition sales of the merged firm. These findings suggest that the SEC’s recent simplification of the redaction process can significantly affect acquisition likelihood and surplus in the corporate control market