The Lemons Market for Disclosure Redactions

Albert Di Wang, Yong Yu

Abstract: This paper investigates peer effects in corporate disclosure redactions, leveraging the 2019 FAST Act as an exogenous reduction in SEC oversight. While redactions increase across industries following the Act, firms respond differently within industries. Our Difference-in-Differences analysis reveals that firms with less proprietary information relative to their peers increase redactions, while those with more actually reduce their redactions. The increase is stronger among firms with greater bad news or lower litigation risk, while the decrease is more pronounced among firms with higher equity-raising needs or lower institutional ownership. Moreover, firms reducing redactions appear to do so in response to peers’ increased redactions. These patterns suggest that reduced oversight fosters agency-driven redactions, which in turn crowd out proprietary-driven ones, exacerbating a lemons problem. As a result, firms—whether increasing or decreasing redactions—experience slower sales growth following the Act. Our findings highlight that policies like the FAST Act, intended to ease the burden of protecting proprietary information through reducing oversight, may paradoxically make it more difficult for firms with legitimate proprietary content to protect it.