Protection of Trade Secrets and Capital Structure Decisions
University of Arizona - Department of Finance
University of British Columbia (UBC) - Sauder School of Business
University of Tennessee
SUNY Binghamton; University of Arizona - Department of Finance
July 15, 2015
We investigate whether a firm’s capital structure decisions are affected by the risk that its competitors could gain access to its “trade secrets.” Our tests exploit the staggered recognition of the Inevitable Disclosure Doctrine (IDD) by U.S. state courts as an exogenous event that increases the protection of a firm’s trade secrets by preventing the firm’s workers who know its trade secrets from working for a rival firm. We first show that the recognition of the IDD in a firm’s state reduces the risk that its rivals could obtain its trade secrets and decreases the competitive threats the firm faces. Next, we document that after the recognition of the IDD in their state firms rebalance their capital structures and increase financial leverage, and that this effect is more pronounced for firms that face a greater ex-ante risk of losing employees who know their trade secrets to rivals. Our results imply that the risk of losing intellectual property to rivals is an important competitive threat that leads firms to choose more conservative capital structures.
Number of Pages in PDF File: 64
Keywords: capital structure, trade secrets, intellectual property, product market competition
JEL Classification: G31, G32, G33, J60, K31, L10, O34
Date posted: May 21, 2014 ; Last revised: July 15, 2015
© 2016 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollobot1 in 0.203 seconds