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 A. Serfling


University of Arizona - Department of Finance

Shweta Srinivasan


University of Arizona - Department of Finance

June 9, 2015


Abstract:     
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 indeed the recognition of the IDD in a firm’s state lowers 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 firms rebalance their capital structures and increase financial leverage, especially firms in more competitive industries, with more workers who know trade secrets, or that face a greater ex-ante risk of losing key employees 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: 71

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: June 10, 2015

Suggested Citation

Klasa, Sandy and Ortiz-Molina, Hernan and Serfling, Matthew A. and Srinivasan, Shweta, Protection of Trade Secrets and Capital Structure Decisions (June 9, 2015). 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 A. Serfling
University of Arizona - Department of Finance ( email )
McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
Shweta Srinivasan
University of Arizona - Department of Finance ( email )
McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
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