Redacted disclosure and analysts' weighting of private and public information

Abstract

This paper investigates whether and how redacting proprietary information in regulatory filings affects financial analysts' weighting of private and public information. I examine this issue in the context of initial public offerings (IPO) where firms are allowed to redact value-relevant, proprietary information in relation to material agreements. To the extent that redaction affects firm information environment, I expect redaction to incentivize analysts to overweight their private information relative to public information. As predicted, I find that analysts' overweighting of private information is greater for redacted IPO firms. Moreover, this result prevails particularly when analysts involved rely more on private information. Next, I find analysts' overweighting of private information is more pronounced for analysts who have limited resources, ability, and attention, and when IPO firms do not receive venture capital financing. Finally, I find that the redaction-overweighting relation is attenuated after the passage of Regulation Fair Disclosure. I also find that analysts' overweighting of private information increases redacted IPO firms' idiosyncratic return volatility. Overall, my results extend prior research by examining the role of firm information environment on analysts' decision-making process.