95 Pages Posted: 21 May 2014 Last revised: 10 Mar 2017
Date Written: March 10, 2017
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: 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