Trade Secrets Protection and Stock Price Crash Risk

Abstract

This paper provides evidence that the effect of trade secrets protection increases stock price crash risk. Using a quasi-experimental setting with the Uniform Trade Secrets Act (UTSA), we find that firms headquartered in states adopting the UTSA tend to have higher stock price crash risk. The results are robust to controlling for other trade secrets laws and the choice of crash risk measures, and they are more pronounced in small firms and firms with high market-to-book and low leverage ratios. A detailed mechanism analysis reveals that increased crash risk for firms under the UTSA is attributed to higher information asymmetry, low reporting quality, and more negative news withheld following the UTSA. Overall, our results highlight that trade secrets protection leads to the unexpected, negative consequence of elevated stock price crash risk.

Keywords: Trade secrets protection; Uniform Trade Secrets Act; Stock price crash risk; Information asymmetry; Earnings response coefficient; Short interest

JEL Classification: G12, G14, D82