Keeping Secrets from Creditors: The Uniform Trade Secrets Act and Financial Leverage
68 Pages Posted: 2 Nov 2017 Last revised: 26 Aug 2019
Date Written: August 24, 2019
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
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