Redaction as a Response to SFAS No. 131’s Mandatory Disclosure of Segment Information

We hypothesize that firms required by SFAS No. 131 to begin disclosing segment information attempt to counteract potential competitive harm by increasing information redaction. Using a difference-in-difference setting, we find that firms increasing the number of reported segments after the rule change exhibit a greater increase in information redaction than firms maintaining the same number of reported segments. Consistent with concerns about competitive harm driving the changes, the significant increases are concentrated in firms with greater divergence in profitability across segments, higher abnormal profitability, and negative abnormal stock returns in response to the SFAS No. 131 finalization. In addition, the firms that observables predict would increase information redaction, but did not, experience decreases in sales growth and profit margin. Our results highlight a way firms act to offset changes in mandatory disclosure. They have implications for understanding disclosure and shed light on firms’ motives for employing confidential treatment of information