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
August 3, 2016
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
Date posted: May 21, 2014 ; Last revised: August 4, 2016
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