Protection of Trade Secrets and Capital Structure Decisions

95 Pages Posted: 21 May 2014 Last revised: 10 Mar 2017

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

Date Written: March 10, 2017

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 these 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 or lower barriers to entry. Our results suggest that firms strategically choose more conservative capital structures when they face greater competitive threats stemming from the potential loss of trade secrets to rivals.

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

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

Suggested Citation

Klasa, Sandy and Ortiz-Molina, Hernan and Serfling, Matthew and Srinivasan, Shweta, Protection of Trade Secrets and Capital Structure Decisions (March 10, 2017). Available at SSRN: https://ssrn.com/abstract=2439216 or http://dx.doi.org/10.2139/ssrn.2439216

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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