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

Abstract

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.