Externalities of Nondisclosure: Evidence from Corporate Investments and Competitors’ Redacted Proprietary Information
Open AccessFirms 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 change their investments when a competitor redacts 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’ R&D; investments and capital expenditures 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 suggests that externalities exist when firms withhold information, and such externalities stem from the information conveyed by the withholding behavior itself.
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