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WhyDoFirmsFileforConfidentialTreatment?

YangCao

Finance and Managerial Economics Department

School of Management
University at Buffalo
253 Jacobs Management Center
Buffalo, NY 14260-4000
Tel: 716-645-5248
Fax: 716-645-3823
Email: caoy@buffalo.edu

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WhyDoFirmsFileforConfidentialTreatment?
YangCao

Abstract
Thispaperinvestigatesthereasonswhyinvestmentfirmsfileforconfidentialtreatment.In
contrastwiththeconventionalthinkingthatconfidentialtreatmentismainlyusedtohide
profitableprivatetradinginformation,whichwillrevealitselfastimepasses,wefindthatthere
areotherreasonsthatfirmsfileforconfidentialtreatment.Wefoundthatfirmswithbadpast
performanceuseconfidentialtreatmenttohidetheirbadperformingstocks.Thereisno
obviousprofitabletradinginformationingeneralconfidentialtreatmentholdings.Itisdueto
thefactthatfirmsuseconfidentialtreatmenttohideliquidatingactivitiesthathaveno
fundamentalinformationcontent.Liquidatingpositions,togetherwithbadperformingstocks,
servedasnoisesthatconcealedtheprofitableprivateinformationinconfidentialtreatment
holdings.Byrecognizingthecomplicationinreportedconfidentialtreatmentholdings,weare
abletoextractprofitabletradinginformation.Wealsofoundevidencethatshortterm,
sophisticatedfirmsaremorelikelytouseconfidentialtreatments.

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1Introduction
Confidentialtreatmentprovidesaleewaytoinvestmentfirms,whoaresubjecttotheSection
13(f)oftheSecuritiesExchangeAct(SEA)of1934.Asanimportantpartofthesecuritiesmarkets
regulation,Section13(f)oftheSEAof1934requirestheinstitutionalinvestmentmanagers,who
exciseinvestmentdecisionsover$100millionormoreinSection13(f)securities1,toreporttheir
holdingsoneachofthequarterendingdatestotheSEC.TheActisintendedtoenhancepublic
confidencetowardthesecuritiesmarkets2.However,disclosingholdinginformationcomeswith
pressurefrominvestmentmanagerswhowere,andshouldbe,veryprotectiveabouttheir
timelyprivatetradinginformation.Inevitably,frontrunningand/ortailgatingwouldemerge
shouldtherebetimelyprivatetradinginformationdisclosedtothepublic.Andthatwouldfirst
hurtthoseinvestorswhosemoneyisatthestake.Itwouldalsodiminishinvestmentmanagers
incentivestoconductfurtherresearchonsecurities,thusleadingtoalessefficientmarketdue
tofewereffortsinpricediscovery.Recognizingthis,CongressauthorizedtheSECtopreventor
delaythepublicdisclosureofcertainholdinginformationifthecorrespondinginvestment
managersuppliedsufficientsupportingevidencesthroughthesocalledconfidentialtreatment
application.Itisworthtonoticethatnoteveryapplicationpursuingconfidentialtreatmentwill
begranted.Infact,moreconfidentialtreatmentapplicationsweredenied3.Usually,theSECwill
delaythedisclosureofgrantedconfidentialtreatmentholdinginformationforuptooneyear.
Beingdenied,orupontheexpirationofthegrantedconfidentialtreatmentapplication,the
investmentmanagersarerequiredtofileanamendmenttotheSECfortheirdenied/expired
confidentialtreatment(CT)holdings.Eventhough,theSECalsodisclosesholdingsinthose

SECprovidesthelistofSection13(f)Securitiesat:http://www.sec.gov/divisions/investment/13flists.htm.
RefertotheFAQhttp://www.sec.gov/divisions/investment/13ffaq.htmabouttheuseofform13F
3
Refertohttp://www.sec.gov/about/forms/form13f.pdffordetailedinformationforapplyingfor
confidentialtreatmentusingform13F
2

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amendments,duetothevarioustimelagsbetweenthoseamendmentsandtheoriginal13F
filings;confidentialtreatmentholdingsinformationwasnevermadeavailabletothepublic
databases,suchasThomsonOwnershipDatabasethatcontainsinstitutionalholdinginformation.

Duetotheabovementionedreason,confidentialtreatmentholdingswereignoredbystudies
thatconductresearchbasedonreportedinstitutionalholdingsinformation.Asurveyofthose
studiescanbefoundinWermers(2006).Byincludingtheconfidentialtreatmentholdings,the
potentialimpactonresearchissignificant.Confidentialtreatmentholdingsinformationenriched
everyaspectofresearchrelatedtoinstitutionalinvestors.Consideringconfidentialtreatment
holdingswillhelpanalysts/researchersbetterstudytheinstitutionalinvestorsperformance.
SuchstudiescanbefoundinGrinblattandTitman(1989,1993),Grinblatt,Titmanand
Wermers(1995),Daniel,Grinblatt,TitmanandWermers(1997),Chen,Jegadeeshand
Wermers,(2000),Wermers(2000,2003),Kacperczyk,SialmandZheng(2005,2008),Wermers,
YaoandZhao(2007),HuangandKale(2009),YanandZhang(2009),GriffinandXu(2009)and
AragonandMartin(2009).Inaddition,includingapplicableconfidentialtreatmentholdings
informationshouldbearationalchoiceforotherstudies,suchasBusheeandGoodman(2007),
BoehmerandKelly(2009),Campbell,RamadoraiandSchwartz(2009)andQian(2010),that
relatedtoinformationcontentinstockholdings.
Anothermajorresearchareaisinthestudyofmarketregulation.Areviewofliteratureonthe
financialreportinganddisclosureregulationcanbefoundfromLeuzandWysocki(2008).
Hirshleifer(1971)andCoffee(1984)suggestthatregulationsforinformationdisclosurewould
reducethesocialwastebyreducingtheduplicationsinresearchefforts.However,thereare
alwaysworriesaboutproblemssuchasfreeridingorfrontrunning,,frominvestmentfirms

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whodisclosetheirholdingsinformation(Coffee(1984),Wermers(2001)andFrank,Poterba,
Shackelford,andShoven(2004)).Itwouldbeinterestingtoknowifimplementationof
confidentialtreatmentapplicationsdidfacilitatetheSEA1934inenhancingmarket
transparencywhilepreservingtheprivateresearchinterestsinsecuritymarkets.
Sinceacademiaisgenerallyunawareoftheexistenceofconfidentialtreatment,thereisscarcely
anyworkonthissubject.Agarwal,Jiang,TangandYang(2010)recentlytookasystematiclookat
theconfidentialtreatmentfilings.Theyfocusedontheconfidentialfilingsfiledbyhedgefunds.
Theyfoundsupportingevidencethatstocksfiledbyhedgefundsareassociatedwith
informationsensitiveevents,andhavevaluableprivateinformationcontents.Inthispaper,we
takeanotherrouteandshowevidencethat,ingeneral,confidentialtreatmentfilingfirmshave
differentincentives.AscitedontheSECswebsite4,theSECwillgrantconfidentialtreatmentif
disclosureofholdinginformationmight,1)identifytheholdingnaturalperson,certainestates,
ortrusts;2)revealanongoingacquisitionordispositionnotcompletedbytheendofthe
reportingperiod;3)revealopenriskarbitragepositions;and4)revealinvestmentstrategythat
useblockpositioning.

Confidentialtreatmentgrantedforthefirstlistedreasonwillnotexpire.Confidentialtreatment
grantedforthelastthreereasonswillbesubjecttoexpiration.Cao(2010)showedthatthe
averageconfidentialtreatmentperiodsisaboutoneyear.Uponexpiration,thefilingsmanagers
arerequiredtofilea13FAmendmenttotheSECindicatingtheexpiredholdinginformation,and
theSECwillthenrevealthoseholdingstothepublic.Therearevarioustimelagsbetweenthe
13FAmendmentandthecorrespondingoriginal13Ffiling.Andthoseamendmentswerenever
madeavailabletothepublicdatabase,whichcanbeusedforsystematicresearch.Literally,one

http://www.sec.gov/divisions/investment/guidance/13fpt2.htm

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couldimaginethatthereisconsiderableinformationhiddeninthoseconfidentialholdingsthat,
ifknown,couldeasilybeturnedintoprofits.However,justaswehaveobservedinearning
management(Hayn(1995),BurgstahlerandDichev(1997)),andoverstatereturns(Bollenand
Pool(2009)),investmentfirmmanagersalsohaveincentivetopolishtheir13Fholdings.
Confidentialtreatmentfilingsprovideaconvenientrefugeforthosewhowanttosheltertheir
badperformingpositionsawayfromthepublic.Wefoundevidencethatfirmswithnegative
quarterendingreturnsaremorelikelytofileforconfidentialtreatmentsfortheirbad
performingstockholdings.

Inansweringthemostcommonquestion:Isthereanyvaluableprivateinformationhiddenin
theconfidentialtreatmentholdings?Weconstructeddifferentportfoliosbasedonthe
confidentialtreatmentholdings.However,wecannotfindanyprofitabletradingstrategy.We
concludethat,ingeneral,thereisnoobviousvaluableprivateinformationinconfidential
treatmentholdings.Thus,theconfidentialtreatmentholdinginformationisnotsoeasyto
understand.Thereareholdingsthathaveappliedforconfidentialtreatmentnotonlyforthe
furtherappreciation/depreciationofthestockpricebutforotherreasons.Toillustrate,we
foundthataconsiderablenumberofstocksweredelistedwithin3monthsaftertheywerefiled
forconfidentialtreatment.Amajorityofthemweredelistedduetomergerandacquisition,and
mostofthepriceappreciationwasachievedbeforetheywerefiledforconfidentialtreatment.
Thisfindingcontradictsthecommonbeliefthatinvestmentfirmsuseconfidentialtreatmentto
hidetheirprivateinformationaboutpossiblefurthermergerandacquisitions;inwhichcase,
stocksshouldappreciatemoreaftertheywerefiledforconfidentialtreatment.Thefundingwas
morealignedwiththefactthatfirmsuseconfidentialtreatmenttohidetheirliquidating

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activities,whichmayormaynothaveanyfundamentalreasonbehindit.Firmssellingstocks
mayjustwanttorealizetheirprofits.

Realizingthatthereweremultipleincentiveswhenfirmsappliedforconfidentialtreatment,we
constructedafilteredtradingstrategytoextractthevaluabletradinginformationfrom
confidentialtreatment.Ourfilteredtradingstrategyprovedtobeprofitable.Thus,thereisstill
valuableprivateinformationhiddenintheconfidentialtreatment.Buteffortshavetobemadeif
onewantstodistinguishthemfromconfidentialtreatmentpositionsmotivatedbyother
incentives.

Therestofthispaperisorganizedasfollows.Section2describesthedata.Section3testsand
showsourmainresults.Section3.1showsthatbadperformingfirmsintendtohidetheirbad
performingstocksthroughapplyingforconfidentialtreatment.Section3.2investigatesthe
possibleexistenceofvaluableprivateinformationintheconfidentialtreatmentholdings.
Section4concludesanddiscussesfurtherimplicationofourfindings.

2Data
Weobtainedcommonstockprice,numberofsharesoutstandingandotherrelatedinformation
fromtheCRSPdatabase.WeobtainedFamaFrench3factorsandCarhart4factorsfrom
KennethFrenchswebsite.5Wecollectedtheinstitutionalholdingsandconfidentialtreatment
holdingsinformationfromthe13FHR/A(13FHoldingReport/Amendments)Formdirectlyfrom
theEDGARdatabase.Wecreatedcomputerprograms,whichdownloadedandreadthe13F
forms,extractedholdingsinformation,andsavedthisonourdatabaseforfurtherstudy.TheSEC

http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

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requiredtheinvestmentfirmstoreporttheirholdingsonthequarterendingdatewithin45days
usingthe13FHRForm.Anychanges,includingrevealingtheexpired/deniedconfidential
treatmentfilings,tothepreviousfilingsweremadethrougha13FHR/Aform.TheSECrequired
investmentfirmstoincludethefollowinglegendintotheconfidentialtreatmentrelated
amendment.
THIS FILING LISTS SECURITIES HOLDINGS REPORTED ON THE FORM
13F FILED ON (DATE) PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT
AND
FOR
WHICH
(THAT
REQUEST
WAS
DENIED/CONFIDENTIAL TREATMENT EXPIRED) ON (DATE).

Itisthroughtheabovelegendthatwedistinguishtheconfidentialtreatmentrelated
amendmentsfromother13FHR/AForms.Weprocessed104,33413FHR(/A)Forms.92,664of
themare13FHRForms.Andthereare1,633amendmentfilesthatareconfidentialtreatment
filings.

Table1liststhesummarystatisticsfororiginal13F(13FHR)andconfidentialtreatmentfilings
(13FHR/A,amendmentrelatedwithconfidentialtreatment)from1999to2008.Onaverage
thereareabout2,033firmsreportedtheir13FsecuritiestotheSEConthequarterlybases,
whileabout1%ofthem(22firms)triedtohidesomeoftheirholdingsthroughconfidential
treatment.Eachfirmissupposedtofileone13FHRFormeachquarter,andtherecouldbe
morethanoneamendmentforconfidentialtreatment.Forexample,ifonlyaportionofits
confidentialtreatmentapplicationwasapproved,aninvestmentfirmwould,atleast,havetwo
amendmentslater:oneforthedeniedportion,andonefortheapprovedportion.The
investmentfirmsarerequiredtofileanamendment45daysaftertheirconfidentialtreatmentis
denied,andtheyalsoneedtofileanamendmentfortheapprovedportionaftertheyexpire.On
average,thereare2039original13Ffilingsperquarter,whichisveryclosetotheaverage
numberof13Ffilingfirms.Otherstatisticsareveryclosetothecorrespondingstatisticsforthe

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numberof13Ffilingfirms,too.Thereareonaverage33confidentialtreatment(CT)filingsper
quarterincontrastwith22CTfilingfirmsperquarter.Thus,asexpected,therearemoreCT
filingsthanCTfilingfirmsperquarter.Investmentfirmsholddifferenttypesofsecuritiessuchas
commonstock,bond,options,ADR,etc.Ourresearchfocusesonthecommonstockholdingsfor
inthe13Fsecurities.Sincethereispossiblereusingofthecusipnumber,weusedboth8digit
cusipnumberandthedateinformationtomatchtheholdingsinboththeoriginalandCT13F
filingswithallthecommonstocksfromCRSP,andusedtheuniquepermnofromCRSPto
identifyindividualcommonstock.Onaverage,investmentfirmsheld4,242commonstocksper
quarter,while1,107commonstockscanalsobefoundintheconfidenttreatmentholdingsper
quarter.Apopularstockcanbeheldbymanyinvestmentfirms;thus,itwouldshowupinmany
investmentfirms13Ffilings.Table1showsthattheaveragetotalnumberofcommonstock
positionsis557,348,whiletheaveragetotalnumberofcommonstockpositionsinconfidential
treatmentfilingsis2,146.ComparedwiththenumberofstocksreportedbytheoriginalandCT
filings,wecaninferthattheCTstockswerelesspopular,andthatfewernumberofinvestment
firmsownedaconsiderablesizeofthem.Finally,theaveragemarketvalueofcommonstocks
perquarterwasabout1.3trillion(fromtheoriginal13Fholdings),whilethatoftheCTfilings
wasabout800million.Thus,theconfidentialtreatmentholdingsrepresentedamuchsmaller
marketshareintheUSstockmarket.

Basedonthefirmsquarterlyholdinginformation,wecalculateddifferentcharacteristicsforthe
investmentfirms.SummarystatisticswereshowninPanelAofTable2.Weused,firmQret,the
valueweightedquarterlyreturnofitscommonstocks,toestimatethequarterlyperformanceof
aninvestmentfirm.Fromthe79021firmquarterobservations,theinvestmentfirmsonly

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achievedasmallpositiveaveragequarterlyreturn(mean=0.34%perquarterandmedian=1.3%
perquarter),whichismainlycausedbythemarketdownturnin2001and2002.Wecreated
firmAmh,afirmsvalueweightedaverageAmihudliquiditiesfromitsholdingcommonstocks,to
proxythefirmlevelliquidity.AndlogSizeisthelog10ofafirmsmarketvalueofitscommon
stocks.Manyinvestmentfirmsheldnotonlycommonstocksbutalsofixedincomesecurities.In
addition,investmentfirmsarealsorequiredtoreporttheiroptionpositionsfor13Fsecurities.
Onemayinferhowsophisticatedandcapableaninvestmentfirmcouldbebyobservinghow
complicateditsportfoliosare.WeusedBondRatio,theratioofmarketvalueofafirmsfixed
incomesecuritiestothemarketvalueofitscommonstocks,tomeasuretheweightoffixed
incomeinaninvestmentfirmsportfolio.AndweusedOptionasadummyvariabletoindicateif
theinvestmentfirmwasinvolvedwithoptiontradingornot.

TheSECusuallygrantedtheconfidentialtreatmentforoneyear.Itwouldbeinterestingtoknow
iftheprivateinformation,ifany,hiddenbytheconfidentialtreatment,waseitherlongterm
informationorshortterminformation.Didtheinvestmentfirmmanagersreallygraspthelong
runfundamentalprivateinformationandusetheconfidentialtreatmenttoprotecttheir
privilegedknowledge,ordidtheyjustjumponandoffthewavetoprofitfromtheshortterm
informationadvantagetheymighthave?YanandZhang(2009)createdchurnrate(CR)to
distinguishshortterminvestorsfromlongterminvestors.Churnratebasicallyofferamethodto
measureaninvestmentfirmsquarterlyturnover.First,aninvestmentfirmsaggregatepurchase
(CR_buyt)andsale(CR_sellt)forquartertarecalculatedas:

,
,

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,
,

WherePi,t1andPi,tarethesharepricesforcommonstocki,andSi,t1andSi,tarethenumberof
sharesofcommonstockiheldbytheinvestmentfirmattheendofquartert1andt,
respectively.ThepriceissplitanddividendsadjustedusingCRSPpriceadjustfactor.Thenthe
investmentfirmschurnrate(CR)forquartertiscalculatedas:
min

_
,

,
,

_
,

PanelBoftable1showsthecorrelationcoefficientmatrixofthefirmlevelvariables.Allthefirm
levelvariablesareindependentwithrespecttoeachother.

3IncentivesforConfidentialTreatmentFilings
Westudieddifferentincentivesbehindafirmaconfidentialtreatmentfilingbehaviorsinthis
section.Wefirstinvestigateifinvestmentfirmsuseconfidentialtreatmenttohidetheirbad
performingstocksforthesimilarintuitionbehindearningmanagement/misreportingreturns.
Then,wefurtherinvestigatewhetherthereisanyvaluableprivateinformationhiddeninthe
confidentialtreatmentfilings.

3.1ConfidentialTreatmentFilingsasaRefugeforBadPerformingStocks
First,wetestedtherelationshipbetweentheconfidentialtreatmentfilingbehaviorwithrespect
totheinvestmentfirmsperformanceandotherfirmlevelcharacteristics.Wecreatedafirm

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leveldummyvariableCT.CT=1whentheinvestmentfirmfiledforconfidentialtreatmentforthe
correspondingquarter;andCT=0otherwise.Then,weconductedthetwowayclustered(firm
andquarter)logisticregressionforCTonfirmquarterlyperformance(firmQret),firmlevel
liquidity(firmAmh),firmsize(logSize),Option,BondRatio,andChurnrate(CR).Theresultis
showninmodelIofTable3.Thenegativeandsignificantintercept,,indicatesthatthe
investmentfirmswouldnotuseconfidentialtreatmentfilingsingeneral.Manyinvestmentfirms,
dependingontheirtradingphilosophy,tradingstrategy,tradingfrequencyandtradingcategory,
areconstructedinsuchawaythatfilingforconfidentialtreatmentswasneithernecessarynor
rationalizable.Betaforfirmsquarterlyperformanceispositiveat10%significantlevel.Itis
relativeweakevidencethatfirmswhomightbecapableandhaveinformationadvantage,thus
havebetterreturns,exploreanymechanism,suchasconfidentialtreatmentfilings,tobenefit
thefirm.Firmliquiditymeasure(firmAmh)isnotsignificantatanylevel.Firmsize(LogSize),the
weightofbondintheholdingportfolio(BondRatio),andoptiontradingindicator(Option)are
alsopositiveandsignificantat1%levelwithrespecttofirmsconfidentialtreatmentfiling
behavior.Theyareallsupportingevidencethatmorecapablefirmsintendtousemechanisms
suchasconfidentialtreatmenttofacilitatetheirtradingactivities.Churnrate(CR)isalso
significantat1%level,indicatingthatfirmspossessingshortterminformationaremorelikelyto
useconfidentialtreatment.Or,confidentialtreatmentholdingsaremorelikelytocontainshort
termprivateinformationotherthanalongtermone.

Sincewearemoreinterestedinhowfirmsperformanceinfluencedtheirconfidentialtreatment
filingdecisions,welookedathowCTfilingfirmsquarterlyreturnsweredistributed.Figure1
showsthehistogramofbothnonCTfilingsandCTfilingfirmsquarterlyreturns.Whilethenon

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CTfilingfirmsquarterlyreturnsrangingfrom90%to+120%,theCTfilingfirmsreturndoesnot
spreadovertheentirereturnrange.Investmentfirmswhohaveextremelygoodorbadreturns
didnotfileconfidentialtreatment.Wecreateddummyvariablesrepresentingdifferentfirm
performanceregions.1[firmQret<0.6]equalsto1whenfirmsvalueweightedcommonstock
quarterlyreturnsislessthan60%,and0otherwise;1[firmQret>0.9]equalsto1whenfirms
valueweightedcommonstockquarterlyreturnsisgreaterthan90%,and0otherwise;1[
0.6<firmQret>0.9]equalsto1whenfirmsvalueweightedcommonstockquarterlyreturnsis
greaterthan60%andlessthan90%,and0otherwise.Thecutoffvalueof60%and90%was
pickedbasedonFigure1.RegressionsofdummyvariableCTon1[firmQret<0.6](1[firmQret>
0.9],1[0.6<firmQret>0.9])andotherfirmlevelvariablesareshowninmodelII,IIIandIVin
Table3.Betafor1[firmQret<0.6](1[firmQret>0.9])inmodelII(III)isnegativelysignificantat1%
level,whilebetafor1[0.6<firmQret>0.9]inmodel(IV)ispositivelysignificantat1%level.Those
resultsconfirmthatfirmswithextremeperformanceswouldnotbother(orjustgiveup)touse
confidentialtreatment.OtherfirmlevelvariablesinmodelII,IIIandIVstayatasimilar
significantlevelcomparedwithmodelI.Sincewearetryingtoexplainwhyfirmsfileconfidential
treatment,wewillfocusonthedatasetthathasfirmQretwithintherangeof(60%and90%).

Hayn(1995)andBurgstahlerandDichev(1997)suggestthatthereisstrongincentiveforfirms
tomaintainpositivereportedearnings.Therearedivergingprospectswheninvestorsare
lookingatpositiveversusnegativeearningsorreturns.Roychowdhury(2006)hasshownthat
firmsconductearningmanagementthroughrealactivities.Applyingforconfidentialtreatment
alsoprovidedinvestmentfirmmanagerssimilaractivitieswheretheycouldpolishtheir
portfolioholdings.First,atthefirmlevel,weinvestigateifaninvestmentfirmperformancehas

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anydirectinfluenceonitsconfidentialtreatmentfilingdecision.Wedividedoursampleintotwo
groupsdependingontheirquarterlyperformances,firmQret.Wecreatedadummyvariable1[
0.6<firmQret<K](1[K<firmQret<0.9])toproxyfordifferentlevelsofaninvestmentfirms
quarterlyperformancesforabad(good)performingfirmquartersample.Sinceweonlylook
atfirmreportingquarterswhen0.6<firmQret<0.9,wedefineabad(good)firmquarter
performingsampleasonewhere0.6<firmQret<0(0<firmQret<0.9).PanelA(B)inTable4
reportsthetwowayclustered(firmandquarter)logisticregressionresultsforthedependent
variableCTon1[0.6<firmQret<K](1[K<firmQret<0.9]),firmQret,firmAmh,LogSize,Option,
BondRatio,andCR.1[0.6<firmQret<K]equalsto1whenfirmQretisgreaterthan0.6and
smallerthanK,whereK=0.1,0.2,0.3,0.4and0.5,and0otherwise.1[K<firmQret<0.9]
equalsto1whenfirmQretisgreaterthanKandsmallerthan0.9,whereK=0.1,0.2,0.3,0.4and
0.5,and0otherwise.PanelAinTable4showsbadfirmperformancealoneisnotadeterminant
factorforfirmsconfidentialtreatmentfilingdecision.PanelBinTable4indicatesthatfirms
enjoyedpositivefirmQretaremorelikelytofileconfidentialtreatments.Especially,firmsare
likelytouseconfidentialtreatmentswhentheirquarterlycommonstockreturnsarearound10%
to20%.Dummyvariable,1[K<firmQret<0.9],issignificantat1%levelforK=0.1andK=0.2.Their
confidentialtreatmentfilingbehaviorfadedwhentheyhadhigherreturns.Dummyvariable,
1[K<firmQret<0.9],isonlysignificantat10%levelforK=0.3andnotsignificantforhigherK
values.Signandsignificantlevelsfortheintercept,firmAmh,LogSize,Option,BondRatio,andCR
remainthesamecomparedwiththoseinTable3.ItisworthmentioningthateventhoughTable
4showsthatfirmsintendedtofileforconfidentialtreatmentwhentheyachievedpositive
quarterlyreturns,itisnotnecessarilyanindicationthatgoodfirmsaremorelikelytofilefor
confidentialtreatment,northatthereisvaluableprivatefundamentalinformationaboutthe
confidentialholdings.Weinvestigatetheinformationcontentsinsection3.2.

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Table4showsevidencethatconfidencefilingbehaviorsareprevalentwithfirmsexperiencing
positivecommonstockquarterlyreturns.Thus,filingforconfidentialtreatment,atleast,isnota
nobrainerforanyinvestmentfirmmanagerwhoseportfolioissufferingabadquarter.
However,thishasnoteliminatedthepossibilitythataninvestmentfirmmanagermightuse
confidentialtreatmenttopolishhis/herportfoliowhenthereisincentiveforhim/hertodoso.
Intuitively,inpolishingtheholdings,theinvestmentmanagerintendstoshowthegood
performingstocksandtohidethebadperformingstocks,ifpossible,throughconfidential
treatmentfilings.Sothisbehaviorwouldbecharacterizedbythecombinedphenomenonof
poorfirmperformanceandbadperformingstocks.Weexaminedthepossibleexistenceofthis
combinedphenomenathroughtheindividualcommonstockholdingintheconfidentialfiling.
Wecreatedadependentdummyvariable,CTStock.CTStockequals1whenacommonstock
holdingofaninvestmentfirmwasfiledforconfidentialtreatmentforthecorrespondingquarter;
CTStockequals0otherwise.Todisentangleotherpossibleincentiveswhenfirmsachieved
positivequarterlyreturns,weonlyfocusoncommonstocksholdingsthatwerefiledbyfirm
quartersthataregreaterthan60%butlessthan0(0.6<firmQret<0).First,weregressedthe
CTStockonthecommonstockquarterlyreturn(Qret),thecommonstockAmihudliquidity
measure(Amh),firmQret,firmAmh,LogSize,Option,BondRatio,andCR.Theresultsareshown
inmodelIofTable5.Theinterceptisnegativeandsignificantatthe1%level,indicatingthata
commonstockwouldusuallynotshowupintheconfidentialtreatmentapplications.Common
stockquarterlyreturn,Qret,issignificantata5%level.Thus,agoodperformingstockismore
likelytobefiledforconfidentialtreatmenteventhoughtheinvestmentfirmwhoholdsitis
experiencinganegativereturnquarter.Liquiditymeasuresatbothstock(Amh)andfirmlevel
(firmAmh)arenotsignificant.AHoldingfirmsoptiontradingactivity(Option),fixedincome

P a g e |16

portionofportfolio(BondRatio),andchurnrate(CR)arenotdeterminantofwhetheroneofits
commonstockholdingswillbefiledforconfidentialtreatmentornot.However,thesizeofthe
holdingfirm(LogSize)isnegativelysignificantat1%level.Theintuitionisthatthemorecommon
stocksthattheinvestmentfirmheld,thelesstheprobabilitythataparticularcommonstock
wouldbefiledforconfidentialtreatment.InmodelIIofTable5,weintroduceanewvariable,
firmQretxQret,whichistheproductoffirmQretandQretwhenbotharenegative,and0
otherwise.firmQretxQretispositivelysignificantat1%level,indicatingthatthepoor
performinginvestmentfirmsaremorelikelytohidebadperformingstocksintheirconfidential
treatmentfilings.Thisisthesupportingevidencethatinvestmentfirmsuseconfidential
treatmentsforbadperformingstockswhentheyhaveincentivetopolishtheirportfolios.
IncludingfirmQretxQretenhancedthesignificantlevelofQretfrom5%to1%.Andthereisno
changetothesignortothesignificantlevelofotherexplanatoryvariables.Weconductthe
robustnessusingcommonstockholdingsfiledbyfirmquartersthataregreaterthan60%and
lessthan90%(0.6<firmQret<0.9).TheregressionresultsareshowninTable6.Allthe
explanatoryvariables,exceptfirmQretandOption,areofthesamesignandsignificantlevel.By
includingthosefirmquarterswhenfirmsachievedpositivecommonstockreturns,firmQret
becamepositivelysignificantat1%level.ThisconfirmedourresultinPanelBofTable4.And
Optionbecamesignificantat10%level.

3.2ValuablePrivateInformationinConfidentialTreatmentFilings
Wehaveshown,fromTable4toTable6,thatinvestmentfirmswhoachievedpositivequarterly
returnsaremorelikelytobeinvolvedwithconfidentialtreatmentfilingsactivities.Thiscouldbe
supportingevidencethatitisthecapableinvestmentfirmmanagerswhouseconfidential

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treatmenttoprotect/benefitfromtheirvaluableprivateinformation.And,whenpeoplefirst
heardabouttheconfidentialtreatment,itisthemostgeneralimpressionthattheremustbe
advantageshiddenintheconfidentialtreatmentfilingswhich,ifknown,couldeasilybeturned
intoprofits.Inotherwords,confidentialtreatmentwasthoughttobemainlyusedtohide
valuable(profitable)privateinformation.Wetestedthevalidityofthisargumentbyforming
simplezerocostportfoliosbasedoncommonstockholdinginformationintheconfidential
treatments.Toreducepossiblenoises,weconstructtheportfoliosusingonlytheholdingsfrom
grantedconfidentialtreatments.6Forthesakeofspace,weonlypresentfourzerocost
portfoliosinTable7.PanelAinTable7reportstheperformanceoftheZeroCostAcquisition
MinusDispositionportfolio.Weconstructtheportfoliobybuyingtheconfidentialcommon
stockswhichwereaccumulatedinthepastquarterbytheconfidentialtreatmentfilers,andat
thesametime,sellingtheconfidentialcommonstockswhichweredisposedinthepastquarter.
Thebuying/sellingportfolioisweightedbythepercentageofaccumulation/dispositionof
confidentialcommonstockswithrespecttotheirnumberofsharesoutstanding.Wereportthe
returnsfortheholdingperiodforonequarter,twoquarters,threequartersandfourquarters
(oneyear).Wealsoreportthet_statvalueforthettestthatifanyofthereturnswere
statisticallysignificantlydifferentfromzero.WerunFamaFrench3factorregressionforeachof
thecorrespondingholdingperiodsandreporttheresults.Noneofholdingperiodreturnofthis
ZeroCostAcquisitionMinusDispositionisstatisticallydifferentfromzero.Thealphaforthe
FamaFrench3factorregressionwassignificantat10%levelfortheholdingperiodof2quarter

TheSECsapproval/denialdecisionontheconfidentialtreatmentfilingsservedasafilteringmechanism.
TheSECwilldeniedtheconfidentialtreatmentapplicationiftheinvestmentmanagerdidnotprovide
enoughsupportingevidence,oriftheSECthinkstheprivateinformationthattheconfidentialtreatment
filerwantstoprotecthadalreadybecomepublicinformation.Thereareabout22%(65%)offilings
(numberofholdings)inthedeniedconfidentialtreatmentfilings.Cao(2010)pointedoutthatthedenied
confidentialtreatmentholdingscouldbeunavailabletothegeneralpublicaslongasthosegranted
confidentialtreatment,whichprovideverystrongincentiveforinvestmentfirmstoabusetheusageof
confidentialtreatmentapplication.

P a g e |18

(6month).However,itisofanegativesign.Otherthanthis,noneofthealpha/betaforthe
FamaFrench3factorregressionisstatisticallysignificantforanyoftheholdingperiod.Thus,
thereisnovaluableprivateinformationthatcanbeextractedbythistradingstrategy.

Onemayfeelmorecomfortableinferringthatthebuyerbelievesthatthestockswillappreciate
whentheyarebuyingthestocks.However,itisnotalwaystruethatthesellerbelievesthatthe
stocks,whichtheyareselling,willdepreciate.Thus,sellingcouldbetriggeredbymoreintuitions,
suchasliquidityreasons,otherthanstockappreciation/depreciation.Insteadofusingboththe
accumulatedanddisposedstocks,weonlyusetheconfidentialstocksthathavebeen
accumulatedduringthepastquarter.Foreachquarter,wedividedtheaccumulatedconfidential
stocksintothreegroupsbasedontheirquarterlyreturns.Weconstructedtheportfolioby
buyingthetop1/3performers,andatthesametime,sellingthebottom1/3performers.The
buying/sellingportfolioisweightedbythepercentageoftopperforming/bottomperforming
confidentialcommonstockswithrespecttotheirnumberofsharesoutstanding.Thisportfolios
performanceisreportedinPanelBinTable7.Onceagain,returnsforalltheholdingperiodare
notstatisticallydifferentfromzero.AlphasfromFamaFrench3factorregressionsarenot
statisticallysignificant,exceptfortheholdingperiodof2quarterwherealphais3.64%andis5%
significant.Thisisweakevidencethatthereisanyvaluableprivateinformationinconfidential
treatmentholdings.

Momentumandcontrarianaretwomostcommontradingstrategies.Assumingthatinvestment
firmmanagersmightalsousethesetwostrategies,andhidetheirintuitionusingconfidential
treatmentfilings,weconstructedaZeroCostMomentumportfolioandaZeroCostContrarian

P a g e |19

portfoliotoinvestigate.TheZeroCostMomentumportfoliowasconstructedbybuyingthe
confidentialstockswhichhadpositivereturns,andwereaccumulatedbytheconfidentialfilers,
andatthesametime,sellingtheconfidentialstockswhichhadnegativereturns,andwere
disposedbytheconfidentialfilers.TheZeroCostContrarianportfoliowasconstructedby
buyingtheconfidentialstockswhichhadnegativereturnsandwereaccumulatedbythe
confidentialfilers,andatthesametime,sellingtheconfidentialstockswhichhadpositive
returnsandweredisposedbytheconfidentialfilers.Andalltheportfolioswereweightedbythe
proportionofaccumulation/dispositionoftheconfidentialtreatmentstocks.Thesetwo
portfoliosperformanceswerereportedinPanelCandDinTable7.FortheZeroCost
Momentumportfolio,neithertheholdingperiodreturnsnorthealphasfromFamaFrench3
factorregressionswerestatisticallysignificantfromzeroforthecorrespondingholdinghorizons.
ForTheZeroCostContrarianportfolio,holdingperiodreturnsfor1quarterand2quarterwere
negativelysignificantat10%level.ThealphafromFamaFrench3factorregressionfor2
quarterholdingperiodwasnegativelysignificantat5%level.Thus,thereisstillnoconvincing
evidencethatthereisanyvaluableprivateinformationbeenpickedupbyanyofoursimple
tradingstrategies.Otherthantheabovementionedportfolios,wealsoconstructedportfolios
usingothersimplestrategies,differentweighting(equal/value),anddifferentsamplessize
(includingthedeniedconfidentialtradingholdings).Andtheresultsaresimilar.Sofar,thereare
noeconomicallyandstatisticallysignificantprofitsthatcouldbegeneratedfromourtrading
strategiesfollowingtheconfidentialtreatmentholdings.Theresultsabovecastdoubtonthe
existenceofanyvaluableprivateinformationhiddeninconfidentialtreatmentholdings.Or,
noises,confidentialholdingsfiledforotherreasons,maybemixedwithvaluableprivate
information.

P a g e |20

Agarwal,Jiang,TangandYang(2010)pointedoutthatMergerandAcquisitionarestrongly
associatedwithconfidentialtreatmentfilingsbehavior.Presumably,investmentfirmswhoare
engagedinriskarbitragestrategieswoulduseconfidentialtreatmenttohidetheirprivate
informationaboutpossiblemergersandacquisitions.Whenthetransactiondoesgothrough,
theywillthenprofitfromthepremiumthattheacquirerpaystothetarget,whichtheymight
secretlyaccumulatedthroughconfidentialtreatmentfilings.Eventually,targetfirmswouldbe
delistedfromtheexchange.Weusethedelistedstockstostudywhatroletheconfidential
treatmentplaysinMergerandAcquisition,orriskarbitrage.

Table8reportsthedistributionsofalldelistedcommonstocks(AllDelisted),delistedstock
shownindeniedconfidentialfilings(DeniedCT),anddelistedstocksshowningranted
confidentialfilings(GrantedCT)from1998totheendof2008.Thereareproportionallymore
merger/acquisitionstocksandlessdroppedstocksshowninstocksappliedforconfidential
treatment.Overall,60.89%ofdelistedstockswereduetomergerandacquisition,while88.37%
(75.10%)ofdelistedstocksingranted(denied)confidentialtreatmentstocksweredueto
mergerandacquisition.37.43%ofdelistedstocksweredroppedbytheexchanges,thisnumber
was9.79%(22.89%)fordelistedstocksingranted(denied)confidentialtreatment.Thus
confidentialtreatmentfilingsfirmsinvolvedmorewithM&Aandplacedlessbetsonstocks
whichwereeventuallydroppedbyexchanges.Thisisevidencethatconfidentialtreatmentfiling
firmsareverylikelytohaveinformationadvantages.Thenextquestionwouldbe:Whatrole
doestheconfidentialtreatmentplaywithrespecttothoseinformationadvantages?

P a g e |21

Ifinvestmentfirmsuseconfidentialtreatmenttohidetheirsecreteaccumulationofstocks,
whichtheyhaveprivateinformationaboutpossiblefuturemergerandacquisition,wewould
expectinvestmentfirmstofileconfidentialtreatmentwaybeforethestocksweredelisteddue
tomergerandacquisition.ExcludingfilingsfromGoldmanSachs,wecountedthenumberof
stockswhichweredelistedwithindifferenttimerangesaftertheywerefiled,andgranted,for
confidentialtreatment(showninPanelATable9).Thereare2,436commonstocksgrantedfor
confidentialtreatmentfrom1998totheendof2008.268outof2,436ofthemweredelisted
withinonemonthafterhavingbeenfiledforconfidentialtreatment.922outof2,436ofthem
weredelistedwithinthreemonthsafterhavingbeenfiledforconfidentialtreatment.Andabout
half(1,109outof2,436)weredelistedwithinoneyearafterhavingbeenfiledforconfidential
treatment.Thedominantreasonfordelistingwasduetomergerandacquisition.About1/3
(883outof2,436)ofthesestocksweredelistedduetoM&Awithinthreemonthsafterhaving
beenfiledforconfidentialtreatment.Onequarter(3months)isrelativelyshortcomparedwith
thetimeittakestocompleteanymergerandacquisition,especiallyifyoucountthetimethat
therewerejustrumorsaboutpotentialM&Atowardatargetfirm.InPanelBofTable9,we
lookedatthosedelistedstocksquarterlyperformancesbeforeandafterthecorresponding
quarterendingdatewhentheywerefiledforconfidentialtreatment.Thedelistedconfidential
stocksduetoM&Aachievedbothpositiveandsignificantquarterlyreturnsbeforeandafter
theywerefiledforconfidentialtreatment.However,theirreturnsweremuchhigherbeforethey
werefiledforconfidentialtreatment(25.24%vs.5.16%),andthedifferenceisstatistically
significantgreaterthanzero.Confidentialfilingdoesnothaveanyimpactontheperformance
forthedelistedconfidentialstocksduetothechangeofexchanges.Delistedconfidentialstocks
thatweredroppedbytheexchangesufferedhugelossesbothbeforeandaftertheywerefiled
forconfidentialtreatment.Andthereisnosignificantdifferencebetweentheperformances(

P a g e |22

48.60%vs.51.41%)beforeandaftertheconfidentialtreatmentfiling.Overall,Table9shows
thatconsiderablenumberofstocksweredelistedduetoM&Awithin3monthsofthemhaving
beenfiledforconfidentialtreatment,andmostoftheirreturnswereachievedbeforetheywere
filedforconfidentialtreatment.Thisevidencesupportsthataconsiderableportionof
confidentialtreatmentholdingswerefilednotforthesecretaccumulationofstocksaimingat
priceappreciationinthefuture,butforthesecretliquidationofstocksaimingatrealizing(or
cashingin)theprofitsontheaccount.
SimilartestsfordeniedconfidentialholdingareshowninTable10.Eventhoughthedenied
confidentialtreatmentstockshavemorenoise,thegeneralresultsaresimilarwithwhathad
beenshowninTable9.Thereare4,368commonstocksdeniedforconfidentialtreatmentfrom
1998totheendof2008.InPanelAofTable10,345outof4,368weredelistedwithinone
monthafterhavingbeenfiledforconfidentialtreatment.823outof4,368ofthemwere
delistedwithinthreemonthsafterhavingbeenfiledforconfidentialtreatment.Andabout1/3
(1,317outof4,368)weredelistedwithinoneyearafterbeenfiledforconfidentialtreatment.
Andthedominantreasonfordelistingisstillduetomergerandacquisition.About1/7(656out
of4,368)ofthemweredelistedduetoM&Awithinthreemonthsafterhavingbeenfiledfor
confidentialtreatment.InPanelBofTable10,thedelistedconfidentialstocksduetoM&Astill
achievedbothpositiveandsignificantquarterlyreturnsbeforeandaftertheywerefiledfor
confidentialtreatment.Theirreturnswerestillmuchhigherbeforetheywerefiledfor
confidentialtreatment(19.39%vs.6.82%)andthedifferenceisstatisticallysignificantgreater
thanzero.Delistedstocksduetothechangeofexchangesshowa5%significant18.29%average
returnwithinthequarterforwhichtheywerefiledforconfidentialtreatment.Delisted
confidentialstocksthatweredroppedbytheexchangesufferedhugelossesbothbeforeand

P a g e |23

aftertheywerefiledforconfidentialtreatment.Andthereissignificantdifferencebetweenthe
performance(44.40%vs.56.76%)beforeandaftertheconfidentialtreatmentfiling.

Table8,9and10helpusrealizethattherearehugesellingincentivesbehindconfidential
treatmentfilingbehavior.Again,sellingincentivetowardacommonstockdoesnotnecessary
containanyfundamentalinformationaboutthefutureappreciation/deprecationofthestock.
Mixedwiththosepossibleprofitstakingincentives,itisunderstandablethatitisnoteasyto
simplymimictheconfidentialtreatmentholdingsandprofitfromthevaluableprivate
information.Nevertheless,confidentialtreatmentstillprovidesagreatwaytoprotect
investmentfirmmanagersvaluableprivateinformation.Itishardtobelievethatmangerswill
notuseittohidethatinformation.Potentially,thereshouldbedifferentwaystoprovethe
existenceofvaluableprivateinformationcontentinconfidentialtreatmentholdings.Wetryto
provethisbyconstructingafilteredportfolio.Valuableprivateinformationissocalledprivate
becausethepublichasnotacquiredor,atleast,hasnotdigestedit.Anditisthechangein
pricesthatbestproxiesforthedegreeofpublicinformation(orthelackofvaluableprivate
information)intheconfidentialstocks.Tofilteroutthosestocksthathavelessvaluableprivate
informationcontents(filedforconfidentialtreatmentforotherincentives),wepicked
confidentialstocksthathadnotexperiencedhugepriceappreciationordepreciationforthe
constructedportfolio.WeconstructedthesameZeroCostMomentumaspreviouslydescribed,
butonlyusedconfidentialstockswhosequarterlyreturnsarewithintherangeof2%.Table11
showstheperformances,FamaFrench3FactorregressionsandCarhart4Factorregressions
resultsfordifferentholdinghorizons.Thisfilteredportfoliohadachievedbotheconomicallyand
statisticallysignificantreturns.Theaverage3monthreturnis7.82%andsignificantat1%level.

P a g e |24

Theaverage6monthreturnis16.18%andsignificantat5%level.Theaverage9monthreturnis
18.96%andsignificantat10%level.Andtheaverage12monthreturnis28.95%andsignificant
at5%level.ShowninPanelAofTable11,the3monthreturnsalphaonFamaFrench3Factor
regressionis8.01%andsignificant1%level.The6month(9month)returnsalphaonFama
French3Factorregressionis13.11%(18.61%)andsignificant10%level.NoneoftheFama
French3factorsarestatisticallysignificant.ThisportfoliosperformancesonCarhart4Factor
regressionachievedasimilarresult,showninPanelBofTable11.The3monthreturnsalpha
onCarhart4Factorregressionis7.32%andsignificant5%level.Thestrongabsolutereturnsof
thisfilteredportfolioprovidesevidencethatthereisvaluableprivateinformationinconfidential
treatmentholdings.Especially,thisportfoliorevealedstrongevidencethatthereisshortterm
(e.g.3month)valuableprivateinformationinconfidentialtreatmentholdings.Thisresultmight
explainwhyourshortterminvestorproxy,CR,ispositivelysignificantinTable3andTable4.
Nevertheless,weonlydescribeonewaytoextractpossiblevaluableprivateinformationfrom
confidentialtreatmentholdings.Potentially,thereareothermethodswhichcouldextractmore
valuableprivateinformation.

4ConclusionsandDiscussion
Basedonouruniquedataset,the13Fconfidentialholdings,wedepictedthreeincentivesbehind
investmentfirmsconfidentialtreatmentfilingbehaviors.Wearguedthatfirmshaveincentive
topolishtheirreportedportfoliousingconfidentialtreatmentfilingsandfoundsupporting
evidencethatpoorperformingfirmshidpoorperformingstocksintheirconfidentialtreatment
filings.Fromresearchonthedelistedconfidentialstocks,wefoundthatconsiderableportionof
confidentialtreatmentholdingswereusedtohideinvestmentfirmsliquidating(profittaking)

P a g e |25

intuitions.Finally,weshowedtheevidenceofvaluableprivateinformationhiddenin
confidentialtreatmentholdingsbyconstructingaspecificportfoliobasedontheconfidential
stocks.Overall,thispaperprovidessupportingevidenceforpolicymakerstoevaluateand
enhancethequalityofthedesignedregulation.

Ourstudyrevealstwotypesofprivateinformationintheconfidentialtreatmentholdings.Oneis
thevaluableprivateinformation,whichcontainstimelyfundamentalinformationaboutthe
correspondingstock.Anyonecouldtradeandprofitfromthisvaluableprivateinformation.We
demonstratetheexistenceofsuchinformationinTable11.Anothertypeofprivateinformation
containsselfinterest(e.g.,liquidity,profittaking,etc.)otherthanfundamentalinformation
aboutthecorrespondingstock.Notjustanyonecanbenefitfromknowingthistypeof
information.Evenifsomeinvestorscanbenefitsfromthistypeofinformation,theirprofitsare
usuallyatthecostofotherinvestorslosses.ShowninTable8and9,possibleprofittaking
incentivesintheconfidentialstockssubjecttoM&Aareagoodexampleofthistypeof
information.Itisworthtonotethat,especiallywhenweconsidertheselfinterestliquidating
(profittaking)incentives,accumulation(disposition)ofstocksinthepastquarterdoesnot
necessarymeanthattheinvestmentfirmbelievesthestockwillcontinuetoappreciate(or
depreciate)inthefuture,andcontinuetoaccumulate(ordispose)thestockinthenextquarter.
Thus,eventhough,wemightstillusetheaccumulation(ordisposition)ofstocksasaproxyfor
investorsprospectsaboutthestock,weneedtousethiswithcaution.

P a g e |26

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P a g e |30

Table1SummaryStatisticsfortheordinaryandconfidentialtreatment13Ffilings
Thistablereportsthesummarystatisticsoftheoriginal(13F)andconfidentialtreatment13F
(CT)filingsonthequarterlybasesfrom1999to2008.Thestatisticswerecategorizedbythe
numberoffirms,numberoffilings,numberofcommonstocks,numberofholdingsandmarket
valueofthecommonstocks(MKV)7.

Num.Of
Firms/
Quarter
Num.Of
Filings/
Quarter
Num.Of
Stocks/
Quarter
Num.Of
Holdings/
Quarter
MKV/
Quarter
(Trillion)

13F

Mean
Median
STD
Min
Max
2033.08
1912.5
391.83
1450
2772

CT

21.97

23

9.21

40

13F

2039.45

1928

388.405

1477

2773

CT
13F

33.51
4242.18

33
4033.5

11.87
364.60

3
3931

52
4981

CT
13F

1107.33
557347.80

1225
564667.5

821.16
99370.68

5
395907

2479
733969

CT
13F

2145.92
1.29

2179
0.84

1756.041
1.37

10
0.19

6490
4.76

8E4

3.3E5

0.002

4.5E7

0.008

CT

Someoutlinersweredroppedfromthisstatistics.

P a g e |31

Table2SummaryStatisticsforthefirmlevelvariablesandcorrelationcoefficientmatrix
PanelA:firmQretisafirmsvalueweightedquarterlyreturnfromitsholdingcommonstocks.
firmAmhisafirmsvalueweightedaverageAmihudliquiditiesfromitsholdingcommonstocks.
LogSizeisthecommonlogarithmofafirmsmarketvalueofitscommonstocks.BondRatioisthe
ratioofmarketvalueofafirmsfixedincomesecuritiestothemarketvalueofitscommon
stocks.Churnisthefirmsquarterlychurnrate.AndOptionisadummyvariable,whichequals1
whenthefirmhasoptions(callorput)initsquarterlyportfolioand0otherwise.

Mean

firmQret
0.0034

Median 0.013
Std
0.1257
#Obs
79021

firmAmh
0.0646

LogSize
5.8223

0.0017
1.1654
79008

5.5153
1.2601
79026

BondRatio
521.353
(22.75%)
0
131900
79022

Chun
0.078

Option
7.08%

0.0463
0.1236
71491

79022

PanelB:Correlationcoefficientmatrixoffirmlevelvariables

firmQret
firmAmh
LogSize
Bond
Chun
Option

firmQret
1

firmAmh
0.0168
1

LogSize
0.0091
0.0382
1

Bond
0.0008
0.0003
0
1

Chun
0.0143
0.0022
0.0745
0.0003
1

Option
0.03
0.0036
0.0041
0.0015
0.1188
1

P a g e |32

Table3DeterminantsofConfidentialTreatmentFirmLevelRegression
Thistablereportthetwowayclustered(firmandquarter)logisticregressionresultsforthe
dependentvariableCT(CT=1whentheinvestmentfirmfiledforconfidentialtreatmentforthe
correspondingquarter;andCT=0otherwise.)onfirmlevelcharacteristics.1[firmQret<0.6]
equalsto1whenfirmsvalueweightedcommonstockquarterlyreturnsislessthan60%,and0
otherwise.1[firmQret>0.9]equalsto1whenfirmsvalueweightedcommonstockquarterly
returnsisgreaterthan90%,and0otherwise.1[0.6<firmQret>0.9]equalsto1whenfirmsvalue
weightedcommonstockquarterlyreturnsisgreaterthan60%andlessthan90%,and0
otherwise.firmQret,firmAmh,LogSize,Option,BondRatio,andCRweredefinedinTable2.
Estimatedcoefficientsarereportedwiththeirtstatistics(inparentheses).Coefficientsmarked
with***,**,and*aresignificantatthe1%,5%,and10%levelrespectively.

Intercept

I
6.7567(15.843)***

firmQret

1.2346(1.845)*

1[firmQret<0.6]

1[firmQret>0.9]

1[0.6<firmQret<0.9]

firmAmh

0.1394(0.590)

0.1411(0.596)

0.1404(0.594)

0.1397(0.590)

LogSize
Option
BondRatio

0.2989(5.311)***
1.1346(3.538)***
1.9748(4.481)***

0.2976(5.253)***
1.1172(3.475)***
1.9867(4.520)***

0.2979(5.255)***
1.1169(3.473)***
1.9876(4.521)***

0.2973(5.240)***
1.1167(3.474)***
1.9881(4.523)***

CR

1.0135(4.144)***

1.0062(4.111)***

1.0040(4.100)***

1.0099(4.118)***

6.18%
69084

6.00%
69084

5.99%
69084

6.00%
69084

PseudoR
#ofObv.

II
6.7333(15.710)***

III
6.7352(15.712)***

IV
17.1374(35.978)***

9.8443(17.500)***

8.9191(16.253)***

10.4059(25.583)***

P a g e |33

Table4FirmPerformanceandConfidentialTreatmentFilingDecision
Thesetablesreportthetwowayclustered(firmandquarter)logisticregressionresultsforthedependentvariableCT(CT=1whenthe
investmentfirmfiledforconfidentialtreatmentforthecorrespondingquarter;andCT=0otherwise.)onfirmlevelcharacteristics.1[
0.6<firmQret<K]isdummyvariablewhichequalsto1whenfirmQretisgreaterthan0.6andsmallerthanK,whereK=0.1,0.2,0.3,0.4and
0.5,and0otherwise.1[K<firmQret<0.9]isdummyvariablewhichequalsto1whenfirmQretisgreaterthanKandsmallerthan0.9,whereK=0.1,
0.2,0.3,0.4and0.5,and0otherwise.firmQret,firmAmh,LogSize,Option,BondRatio,andCRweredefinedinTable2.Estimatedcoefficientsare
reportedwiththeirtstatistics(inparentheses).Coefficientsmarkedwith***,**,and*aresignificantatthe1%,5%,and10%levelrespectively.
PanelA:InvestmentFirmswithNegativefirmQret

K=0.1

K=0.2

K=0.3

K=0.4

K=0.5

Intercept

7.0850(13.866)***

7.0455(13.884)***

7.0810(13.965)***

7.0940(13.943)***

7.0888(13.854)***

1[0.6<FirmQret<K]

0.0422(0.173)

0.1297(0.256)

0.1954(0.309)

0.9789(1.363)

1.5101(1.475)

FirmAmh

0.2830(0.917)

0.2652(0.875)

0.2901(0.931)

0.2993(0.958)

0.2992(0.944)

LogSize

0.3469(5.272)***

0.3449(5.265)***

0.3478(5.328)***

0.3489(5.356)***

0.3492(5.313)***

Option

1.0741(3.352)***

1.0777(3.359)***

1.0723(3.344)***

1.0795(3.365)***

1.0779(3.359)***

BondRatio

1.9046(4.150)***

1.9022(4.134)***

1.9040(4.160)***

1.8979(4.154)***

1.9121(4.174)***

CR

0.9560(3.405)***

0.9657(3.459)***

0.9587(3.444)***

0.9456(3.476)***

0.9360(3.406)***

PseudoR2

6.45%

6.36%

6.35%

6.46%

6.43%

#ofObv.

30368

30368

30368

30368

30368

P a g e |34

PanelB:InvestmentFirmswithPositivefirmQret

K=0.1

K=0.2

K=0.3

K=0.4

K=0.5

Intercept

6.6453(14.754)***

6.5899(15.023)***

6.5248(14.623)***

6.4711(14.491)***

6.4749(14.596)***

1[K<FirmQret<0.9]

0.5460(3.876)***

0.9328(4.266)***

0.8671(1.847)*

0.2241(0.394)

0.5758(0.854)

firmAmh

0.0793(0.371)

0.1348(0.479)

0.0589(0.363)

0.0334(0.390)

0.0356(0.392)

LogSize

0.2598(4.506)***

0.2667(4.727)***

0.2633(4.602)***

0.2578(4.474)***

0.2583(4.501)***

Option

1.1720(3.372)***

1.1878(3.426)***

1.1758(3.389)***

1.1615(3.343)***

1.1628(3.348)***

BondRatio

2.0233(4.348)***

2.0124(4.349)***

2.0334(4.425)***

2.0443(4.440)***

2.0401(4.420)***

CR

1.0401(3.534)***

1.0107(3.375)***

1.0566(3.537)***

1.0766(3.650)***

1.0757(3.651)***

PseudoR2

6.42%

6.46%

6.03%

5.85%

5.86%

#ofObv.

38641

38641

38641

38641

38641

P a g e |35

Table5ConfidentialTreatmentFilingBehaviortheStockLevelRegression

Thesetablesreportthetwowayclustered(firmandquarter)logisticregressionresultsforthe
dependentvariableCTStock(CTStock=1whenacommonstockholdingbyaninvestmentfirm
wasfiledforconfidentialtreatmentforthecorrespondingquarter;CTStockequalsto0
otherwise.)onbothstocklevelandfirmlevelcharacteristics.Qretisthecommonstocks
quarterlyreturn.AmhisthequarterlyAmihudliquiditymeasureofthecommonstock.
firmQretxQretistheproductoffirmQretandQretwhenbothofthemarenegative.firmQret,
firmAmh,LogSize,Option,BondRatio,andCRweredefinedinTable2.Estimatedcoefficientsare
reportedwiththeirtstatistics(inparentheses).Coefficientsmarkedwith***,**,and*are
significantatthe1%,5%,and10%levelrespectively.Theregressionwasconductedonthe
sampleswhere0.6<firmQret<0.

Intercept
Qret
firmQret
firmQretxQret
Amh
firmAmh
LogSize
Option
BondRatio
CR
PseudoR2
#ofObv.

II

3.4834(3.825)***

3.4566(3.842)***

0.3434(2.249)**
1.8117(0.478)

0.00437(0.436)
0.9699(0.587)

0.6537(4.095)***
0.0971(0.030)
11.5138(4.122)***
0.00683(0.510)
1.0888(0.618)

0.4019(3.114)***

0.4009(3.102)***

1.4291(1.484)
0.1761(0.378)
0.0867(0.140)
4.18%
8573795

1.4192(1.472)
0.1663(0.359)
0.0815(0.132)
4.63%
8573795

P a g e |36

Table6ConfidentialTreatmentFilingBehaviorthecombinedphenomenon(Robustness)

Thesetablesreportthetwowayclustered(firmandquarter)logisticregressionresultsforthe
dependentvariableCTStock.firmQretxQret,Amh,firmQret,firmAmh,LogSize,Option,
BondRatio,andCRweredefinedinTable5.Estimatedcoefficientsarereportedwiththeirt
statistics(inparentheses).Coefficientsmarkedwith***,**,and*aresignificantatthe1%,5%,
and10%levelrespectively.Theregressionwasconductedonthesampleswhere
0.6<firmQret<0.9.

Intercept
Qret
firmQret
firmQretxQret
Amh
firmAmh
LogSize
Option
BondRatio
CR
PseudoR2
#ofObv.

I
2.9541(3.434)***
0.3235(2.686)***
2.4462(1.969)**
0.00124(0.252)
0.5596(0.550)
0.4727(3.215)***
1.5739(1.850)*
0.2833(0.623)
0.2620(0.581)
5.39%
19627939

II
3.0774(3.556)***
0.5202(4.998)***
3.5095(3.476)***
17.2371(2.801)***
0.00268(0.375)
0.7679(0.647)
0.4657(3.180)***
1.5674(1.840)*
0.2719(0.599)
0.2530(0.559)
5.90%
19627939

P a g e |37

Table7ZeroCostPortfoliosbasedonConfidentialTreatmentHoldings
ThistablereportsthereturnsandcorrespondingFamaFrench3factorregressionresultsof
zerocostportfoliosconstructedbasedongrantedconfidentialtreatmentholdinginformation
forhorizonsrangingfromonequarteruptooneyear.Thestocksintheconstructedportfolios
areweightedbythecorrespondingpercentageofacquisition/dispositionbytheconfidential
filers.Estimatedcoefficientsarereportedwiththeirtstatistics(inparentheses).Coefficients
markedwith***,**,and*aresignificantatthe1%,5%,and10%levelrespectively.

PanelA:ZeroCostAcquisitionMinusDispositionportfoliowasconstructedbybuyingthe
confidentialcommonstockswhichwereaccumulatedinthepastquarterbytheconfidential
treatmentfilers,andatthesametime,sellingtheconfidentialcommonstockswhichwere
disposedinthepastquarter.

Return

mean
t_stat

3month
0.0122
0.6774

6month
0.0390
1.4720

9month
0.0140
0.3961

12month
0.0228
0.6861

Fama
French3
Factor
model

Intercept

0.0101
(0.5382)
0.2440
(1.0782)
0.1941
(0.5488)
0.1478
(0.7178)
7.38%
42

0.0541*
(1.8865)
0.0687
(0.2948)
0.4455
(1.3153)
0.1297
(0.6369)
6.20%
41

0.0260
(0.6523)
0.1168
(0.4866)
0.3223
(0.9171)
0.1938
(0.9575)
4.52%
40

0.0486
(1.2787)
0.1335
(0.7116)
0.4097
(1.4720)
0.1357
(0.8694)
11.12%
39

Mkrf
SMB
HML
R2
#ofObv.

P a g e |38

PanelB:ZeroCostTop(1/3)AcquisitionPerformersMinusBottom(1/3)AcquisitionPerformers
portfoliowasconstructedbybuyingthetop1/3performers,andatthesametime,sellingthe
bottom1/3performers

Return

mean
t_stat

3month
0.0042
0.3675

6month
0.0125
0.6987

9month
0.0124
0.5964

12month
0.0075
0.2880

Fama
French3
Factor
model

Intercept

0.0046
(0.4026)
0.2222
(1.6131)
0.0480
(0.2231)
0.1415
(1.1288)
14.74%
42

0.0348**
(2.0606)
0.2251
(1.6434)
0.6928***
(3.4793)
0.1088
(0.9086)
28.64%
41

0.03640
(1.6636)
0.1902
(1.4454)
0.5139**
(2.6673)
0.0249
(0.2249)
17.75
40

0.0280
(1.0940)
0.4121***
(3.2636)
0.6211***
(3.3142)
0.1390
(1.3229)
33.97%
39

Mkrf
SMB
HML
R2
#ofObv.

PanelC:TheZeroCostMomentumportfoliowasconstructedbybuyingtheconfidentialstocks
whichhadpositivereturnsandwereaccumulatedbytheconfidentialfilers,andatthesame
time,sellingtheconfidentialstockswhichhadnegativereturnsandweredisposedbythe
confidentialfilers.

Return

mean
t_stat

3month
0.0195
0.7573

6month
0.0596
1.0795

9month
0.0708
1.0862

12month
0.0635
0.7203

Fama
French3
Factor
model

Intercept

0.0218
(0.8533)
0.5536*
(1.7952)
0.2318
(0.4810)
0.4443
(1.5837)
16.07%
42

0.0705
(1.1473)
0.1924
(0.3856)
0.3450
(0.4758)
0.0445
(0.1021)
0.95%
41

0.0893
(1.1907)
0.0441
(0.0977)
0.3580
(0.5421)
0.0632
(0.1661)
0.90%
40

0.1136
(1.0834)
0.0207
(0.0400)
0.5759
(0.7497)
0.3393
(0.7875)
3.58%
39

Mkrf
SMB
HML
R2
#ofObv.

P a g e |39

PanelD:TheZeroCostContrarianportfoliowasconstructedbybuyingtheconfidentialstocks
whichhadnegativereturnsandwereaccumulatedbytheconfidentialfilers,andatthesame
time,sellingtheconfidentialstockswhichhadpositivereturnsandweredisposedbythe
confidentialfilers.

Return

mean
t_stat

3month
0.0439*
1.7281

6month
0.0608*
1.6976

9month
0.0355
0.8246

12month
0.0169
0.2864

Fama
French3
Factor
model

Intercept

0.0408
(1.6400)
0.6347**
(2.1112)
0.1703
(0.3625)
0.6043**
(2.2094)
17.76%
42

0.0962**
(2.6881)
0.2988
(1.0287)
1.0563**
(2.5013)
0.2197
(0.8652)
20.31%
41

0.0628
(1.3211)
0.0854
(0.2985)
0.6467
(1.5450)
0.2498
(1.0362)
8.78%
40

0.0202
(0.3129)
0.1311
(0.4127)
0.7507
(1.5917)
0.5555**
(2.0999)
18.96%
39

Mkrf
SMB
HML
R2
#ofObv.

P a g e |40

Table8DelistedStocksDistribution

Thistablereportsthedistributionsofalldelistedcommonstocks(AllDelisted),delistedstock
shownindeniedconfidentialfilings(DeniedCT)anddelistedstocksshowningranted
confidentialfilings(GrantedCT)from1998totheendof2008.Thefirstcolumnisthefirstdigit
ofdelistcodeusedbyCRSP.Thesecondcolumnlistsreasonsofdelisting.Numberofstocksand
correspondingweightinpercentagetermarelistedforeachgroup(AllDelisted,DeniedCTand
GrantedCT).

Code
2
3
4
5
Total

Type
Merger
Exchange
Liquidate
Drop

AllDelisted
4259
60.89%
89
1.27%
29
0.41%
2618
37.43%
6995
100%

DeniedCT
1683
75.10%
41
1.83%
4
0.18%
513
22.89%
2241
100.00%

GrantedCT
1535
88.37%
30
1.73%
2
0.12%
170
9.79%
1737 100.00%

P a g e |41

Table9DelistedStocksinGrantedConfidentialTreatmentFilings

PanelA:numberofgrantedconfidentialstocksdelisted1month(upto12months)afterbeen
filedforconfidentialtreatment
Delist
Type
Merger
Exchange
Liquidate
Drop
total

Delisted
within1m
249
5
0
14
268

Delisted
within2m
570
8
0
24
602

Delisted
within3m
883
12
0
27
922

Delisted
within6m
1062
13
0
38
1113

Delisted
within9m
1109
14
0
48
1171

Delisted
within12m
1109
17
1
59
1186

PanelB:Quarterlyreturnsforgrantedconfidentialstocks,whichweredelistedwithin3month
ofthecorrespondingconfidentialtreatmentfilingquarter,beforeandaftertheappliedquarter
end.Standarddeviationswereshownintheparentheses.Returnsmarkedwith***,**,and*
aresignificantatthe1%,5%,and10%levelrespectivelyreflectingthenonzeromeanttest
results.
Delist
Type
Merger
Exchange
Liquidate
Drop
Overall
Delisted

Before

After

Difference

25.24%(46.80%)***
9.25%(27.49%)

48.60%(51.95%)***
22.83%(48.39%)***

5.16%(20.53%)***
8.69%(15.52%)

51.41%(40.29%)***
3.52%(23.36%)***

Numberof
stocks
20.08%(52.32%)*** 869
0.56%(30.81%)
12

2.81%(59.54%)
27
19.31%(52.42%)*** 908

P a g e |42

Table10DelistedStocksinDeniedConfidentialTreatmentFilings

PanelA:numberofdeniedconfidentialstocksdelisted1month(upto12months)afterbeen
filedforconfidentialtreatment
Delist
Type
Merger
Exchange
Liquidate
Drop
total

Delisted
within1m
263
8
1
73
345

Delisted
within2m
484
12
1
128
625

Delisted
within3m
656
15
2
150
823

Delisted
within6m
823
17
2
205
1047

Delisted
within9m
904
19
2
249
1174

Delisted
within12m
995
22
2
298
1317

PanelB:Quarterlyreturnsfordeniedconfidentialstocks,whichweredelistedwithin3monthof
thecorrespondingconfidentialtreatmentfilingquarter,beforeandaftertheappliedquarter
end.Standarddeviationswereshownintheparentheses.Returnsmarkedwith***,**,and*
aresignificantatthe1%,5%,and10%levelrespectivelyreflectingthenonzeromeanttest
results.
Delist
Type
Merger
Exchange
Liquidate
Drop
Overall
Delisted

Before

After

Difference

19.39%(46.82%)***
11.19%(38.87%)
0.67%(14.14%)
44.40%(39.90%)***
7.35%(51.48%)***

6.82%(20.46%)***
18.29%(26.46%)**
1.11%(2.59%)
56.76%(36.26%)***
4.36%(34.39%)***

Numberof
stocks
12.56%(53.22%)*** 639
29.48%(54.63%)*
15
1.78%(11.55%)
2
12.37%(55.99%)*** 143
11.71%(53.92%)*** 799

P a g e |43

Table11FilteredZeroCostMomentumPortfolioPerformances

ThisTablereportsshowstheFiltered(2%)ZeroCostMomentumportfoliosperformances,
FamaFrench3FactorregressionsandCarhart4Factorregressionsresultsfordifferentholding
horizons.Thestocksintheconstructedportfoliosareweightedbythecorresponding
percentageofacquisition/dispositionbytheconfidentialfilers.Estimatedcoefficientsare
reportedwiththeirtstatistics(inparentheses).Coefficientsmarkedwith***,**,and*are
significantatthe1%,5%,and10%levelrespectively.

PanelA:PerformancesandFamaFrench3FactorRegression

Return

mean
t_stat

3month
0.0782***
2.8903

6month
0.1618**
2.4092

9month
0.1896*
1.9862

12month
0.2895**
2.1576

Fama
French3
Factor
model

Intercept

0.0801***
(2.7773)
0.1290
(0.3408)
0.0217
(0.0401)
0.2803
(0.8463)
2.03%
41

0.1311*
(1.8069)
0.2702
(0.4240)
0.9806
(1.1550)
0.3127
(0.6059)
6.61%
40

0.1861*
(1.6952)
0.0579
(0.0828)
0.2499
(0.2620)
0.3900
(0.6899)
1.60%
39

0.1947
(1.2290)
0.6773
(0.8153)
1.6190
(1.4206)
0.2206
(0.3362)
6.37%
38

Mkrf
SMB
HML
R2
#ofObv.

PanelB:PerformancesandCarhart4FactorRegression

Return

mean
t_stat

3month
0.0782***
2.8903

6month
0.1618**
2.4092

9month
0.1896*
1.9862

12month
0.2895**
2.1576

Carhart4
Factor
model

Intercept

0.0732**
(2.1594)
0.0088
(0.0183)
0.0189
(0.0340)
0.0979
(0.1742)

0.1131
(1.2236)
0.4500
(0.5260)
0.9728
(1.1310)
0.0707
(0.0770)

0.0994
(0.6648)
0.5325
(0.5411)
0.1650
(0.1714)
0.3201
(0.3184)

0.2947
(1.2272)
1.1778
(0.9593)
1.6959
(1.4626)
0.8156
(0.6500)

0.2147
(0.4042)
2.48%
41

0.2866
(0.3201)
6.89%
40

0.9277
(0.8560)
3.67%
39

0.7872
(0.5585)
7.25%
38

Mkrf
SMB
HML

UMD
R2
#ofObv.

P a g e |44

Figure1HistogramofNonCTFilingandCTFilingFirmsQuarterlyReturns(firmQret)
ThesubplotatthetopisthehistogramofnonCTfilingfirmsfirmQret.Thesubplotatthe
bottomisthehistogramofCTfilingfirmsfirmQret.firmQretwasdefinedinTable2.