Redact When Competitors Act -- Examining the Threat of Rivals’ Product Portfolio Modifications

Abstract

This study investigates whether incumbents are more likely to withhold mandatory disclosures when rivals modify product portfolio to reposition themselves and whether such redactions preserve product market competitiveness. Using a large sample of hand-collected redactions from new material contracts to capture managers’ decision to withhold information, we find that product market instability and product threat from new rivals vary directly with the likelihood of redactions. We also document that incumbent firms are more likely to redact only when they have higher leverage or less cash holding relative to new rivals. This highlights that new entries will likely post the greatest threat when they are more financially capable than incumbent firms. Furthermore, redacting firms experience higher market share growth, greater market power and larger abnormal returns. Interestingly, these product market outcomes are concentrated in research/development- and license-related information redactions.