Externalities of Nondisclosure: Evidence from The Spillover Effect of Redacted Proprietary Information on Corporate Investment

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2020-08-14
Authors
Chen, Xiangpei
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Firms can request to redact proprietary information from their material contracts under the Freedom of Information Act (FOIA). Such redactions reveal a manager's decision to withhold information mainly due to proprietary cost concerns. This study investigates whether firms take action when a competitor withholds proprietary information from material contracts. I hypothesize that firms gain additional knowledge about growth opportunities and perceive signals about future competitiveness from a rival's redactions. I find that firms respond with increased investments. More specifically, firms' capital investments and R&D investments increase after observing redactions from a rival's investment-related contracts and R&D/License/Collaboration agreements. The spillover effect is stronger for firms that operate in more competitive industries, when their product markets are less stable, and when a similar-sized competitor redacts proprietary information. Overall, my evidence supports that externalities exist when firms withhold information, and such externalities stem from the information conveyed by withholding behavior itself.
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Redacted Disclosure, Externalities, Investment
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