Abstract

http://ssrn.com/abstract=2439216
 


 



Protection of Trade Secrets and Capital Structure Decisions


Sandy Klasa


University of Arizona - Department of Finance

Hernan Ortiz-Molina


University of British Columbia (UBC) - Sauder School of Business

Matthew Serfling


University of Tennessee

Shweta Srinivasan


SUNY Binghamton; University of Arizona - Department of Finance

August 3, 2016


Abstract:     
We examine 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 mobility of its workers who know trade secrets to rival firms. Next, we document that after the recognition of the IDD in their state firms increase financial leverage relative to that of rivals in non-affected states, 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, for those facing financially stronger rivals, and for those in industries with more specific assets. 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: 82

Keywords: capital structure, trade secrets, intellectual property, product market competition

JEL Classification: G31, G32, G33, J60, K31, L10, O34


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Date posted: May 21, 2014 ; Last revised: August 4, 2016

Suggested Citation

Klasa, Sandy and Ortiz-Molina, Hernan and Serfling, Matthew and Srinivasan, Shweta, Protection of Trade Secrets and Capital Structure Decisions (August 3, 2016). Available at SSRN: http://ssrn.com/abstract=2439216 or http://dx.doi.org/10.2139/ssrn.2439216

Contact Information

Sandy Klasa (Contact Author)
University of Arizona - Department of Finance ( email )
McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-8761 (Phone)
Hernan Ortiz-Molina
University of British Columbia (UBC) - Sauder School of Business ( email )
2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-6095 (Phone)
604-822-4695 (Fax)
Matthew Serfling
University of Tennessee ( email )
Haslam College of Business
Knoxville, TN 37996
United States
865-974-1952 (Phone)
Shweta Srinivasan
SUNY Binghamton ( email )
P.O. Box 6015
Binghamton, NY 13902-6015
United States
HOME PAGE: http://www.shwetasrinivasan.com
University of Arizona - Department of Finance ( email )
McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
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