Recent research suggests that differences between the economic and legal definitions of materiality can impose adverse consequences on equity investors. We explore this issue in the context of redacted Securities and Exchange Commission (SEC) filings. The SEC requires issuer firms to disclose entry into material contracts within four days of contract signing in an 8-K filing and file the agreement in EDGAR either as an exhibit in an 8-K or in the next periodic filing. Because some material contracts contain proprietary information, firms can redact specific information from material contracts so long as the redacted information 1) would cause competitive harm if disclosed and 2) is immaterial to investors. These joint criteria are inherently contradictory because commercially sensitive information that would cause competitive harm, if disclosed, is likely to be important to an investor’s decision making. However, the SEC rarely rejects companies’ redactions which suggests that most companies meet this joint requirement. Together, these statements imply that the SEC’s threshold when assessing legal materiality may be different from the threshold investors apply when assessing economic materiality.

Using a sample of SEC filings with material contract exhibits between January 2007 and April 2019, we conduct two sets of tests that are designed to assess the implications of non-disclosed information (in this case, redacted information) to the market. First, we compare the speed of the stock market price discovery process over the 253 trading-days following SEC filings with at least one redacted material contract to SEC filings with non-redacted material contracts. If redacted information is economically material to investors, we expect slower price discovery because the redacted information should hamper the informational efficiency of stock prices. We find that price discovery is significantly slower following SEC filings that contain redacted contracts as compared to SEC filings with only non-redacted contracts. To address the concern that redacting firms might be significantly different than non-redacting firms due to unobservable factors, we restrict the sample to firms that redact and focus on variation between filings with redacted versus non-redacted contracts. We find qualitatively similar results in these tests. We then examine the subsample of redacted contracts where SEC required the company to disclose some previously redacted information because the SEC staff judged the information to be material and/or ineligible for redaction (i.e., un-redactions). During the period when the un-redacted contracts are under SEC review, we find that stock market price discovery is significantly slower than non-redacted contracts and is not significantly different than other redacted contracts. After these contracts are un-redacted, stock price discovery increases and is not significantly different than non-redacted contracts. Because un-redactions provide a reliable ex-post indicator that managers redacted material information, this test validates our conclusions that material redactions contribute to slower price discovery.

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