Nondisclosure and analyst behavior: Evidence from redaction of proprietary information from public filings

Abstract

This study explores how redacting proprietary information from public filings is related to analyst following and the properties of analysts' earnings forecasts. Using hand-collected data on firms' confidential treatment orders from the Securities and Exchange Commission's Electronic Data Gathering, Analysis, and Retrieval database, this study identifies firms that withhold information—redacting firms. Such firms are benchmarked to a matched set of firms not withholding information—non-redacting firms. The study predicts and demonstrates that compared to non-redacting firms, redacting firms have (i) a higher analyst following, (ii) more dispersed and less accurate analysts' earnings forecasts, and (iii) less precise public and private information in analysts' earnings forecasts. Further, additional analyses reveal that analysts covering redacting firms trade off accuracy for timeliness when issuing earnings forecasts, and the market reacts higher to the analyst reports of redacting firms. Moreover, for redacting firms, investors place a higher weight on the information derived from analysts than that obtained from the firm. Overall, the findings suggest that redacted disclosures are associated with greater investor demand for analyst outputs and a deterioration in the analysts' information environment. However, they are also associated with greater investor reliance on analyst outputs.