Keeping Secrets from Creditors: The Uniform Trade Secrets Act and Financial Leverage

68 Pages Posted: 2 Nov 2017 Last revised: 26 Aug 2019

See all articles by Scott B. Guernsey

Scott B. Guernsey

University of Cambridge - Judge Business School

Kose John

New York University (NYU) - Department of Finance

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business; University of Pennsylvania - Wharton Financial Institutions Center

Date Written: August 24, 2019

Abstract

This paper examines the impact of trade secrets-based intangibility on capital structure by exploiting the quasi-natural experiment provided by staggered adoptions of the Uniform Trade Secrets Act (UTSA) which codified protection of trade secrets in 46 U.S. states from 1980 to 2013. We document that enhanced trade secrets protection results in significant reductions in financial leverage, especially for firms more ex-ante reliant on secrecy. We also find the UTSA leads to more secrecy by incentivizing greater overall investments in intangibles and away from patents. Our findings support the asset pledgeability hypothesis whereby greater firm intangibility magnifies contractibility problems with creditors.

Keywords: financial leverage, capital structure, uniform trade secrets act, intangibles, patents, asset pledgeability hypothesis

JEL Classification: G32, G33, K22, O31, O32, O34

Suggested Citation

Guernsey, Scott B. and John, Kose and Litov, Lubomir P., Keeping Secrets from Creditors: The Uniform Trade Secrets Act and Financial Leverage (August 24, 2019). Available at SSRN: https://ssrn.com/abstract=3063466 or http://dx.doi.org/10.2139/ssrn.3063466

Scott B. Guernsey (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Kose John

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business ( email )

307 West Brooks
Norman, OK 73019-4004
United States

University of Pennsylvania - Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

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