Actively Keeping Secrets from Creditors: Evidence from The Uniform Trade Secrets Act

97 Pages Posted: 2 Nov 2017 Last revised: 13 Oct 2020

See all articles by Scott Guernsey

Scott Guernsey

University of Tennessee - Department of Finance

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: September 24, 2020

Abstract

We find that an increase in a firm’s incentives to use trade secrets to protect its intellectual property results in a more actively managed capital structure. Exploiting U.S. states’ adoption of the Uniform Trade Secrets Act as a positive “shock” in the protection afforded to trade secrets, we find that firms covered by the Act reduce debt levels while increasing investments in intangibles. Additional tests suggest that firms fund these financing and investment activities by issuing more equity. Consistent with an increase in overall intangibility magnifying contracting problems with creditors, we find that covered firms experience higher costs of debt.

Keywords: Trade secrets, intangibles, capital structure, financing, asset pledgeability

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

Suggested Citation

Guernsey, Scott and John, Kose and Litov, Lubomir P., Actively Keeping Secrets from Creditors: Evidence from The Uniform Trade Secrets Act (September 24, 2020). Available at SSRN: https://ssrn.com/abstract=3063466 or http://dx.doi.org/10.2139/ssrn.3063466

Scott Guernsey (Contact Author)

University of Tennessee - Department of Finance ( email )

Haslam College of Business
Knoxville, TN 37996
United States

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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