Takeover Threats and Mandatory Disclosure Avoidance: Evidence from Contract Redactions

Mandatory disclosure is a primary source of public information available to acquirers, yet little is known about how potential target managers respond to takeover threats by avoiding mandatory disclosure. This study focuses on redactions in material contracts as a setting of mandatory disclosure avoidance. We find that managers facing takeover threats are more likely to redact material contracts than other managers. To better differentiate the motives for redactions, we classify redacted contracts into nine different categories and examine managers’ redaction decisions on the three most prominently redacted types. We find managers facing takeover threats redact research and development contracts more heavily when firms possess trade secrecy, as a strategy to thwart technological acquisitions aiming at innovation combinations. By contrast, managers redact purchase and sales contracts and license and royalty contracts more heavily when they have greater private control benefits. Overall, our results highlight new tactics that managers use when they face takeover threats, especially under threats of technological acquisitions.