Trade Secret Protection and Firms’ Internal Transparency

55 Pages Posted: 8 Jul 2021 Last revised: 23 Feb 2022

See all articles by Ionela Andreicovici

Ionela Andreicovici

Frankfurt School of Finance & Management

Sara Bormann

Goethe-University Frankfurt

Katharina Hombach

Carl von Ossietzky University of Oldenburg

Date Written: October 18, 2021

Abstract

We examine the effects of trade secret protection laws on firms’ internal transparency. By internal transparency, we refer to the extent to which information is integrated, distributed, and shared within the firm. We argue that stronger trade secret protection reduces firms’ proprietary costs of information leakage and thus incentivizes firms to increase their internal transparency. To test our prediction, we construct a novel proxy of firms’ internal transparency based on the share of sites integrated into its enterprise system and exploit the staggered adoption of trade secret protection laws via the Uniform Trade Secrets Act. We find that stronger trade secret protection increases firms’ internal transparency, and that the effect is stronger (weaker) for firms with more pronounced proprietary costs (coordination benefits). In supplemental tests, we distinguish our proxy from information security as well as general software investments and refute alternative explanations that trade secret protection laws affect internal transparency primarily via other channels such as firms’ innovation incentives, external reporting incentives, or reduced financial constraints. Taken together, our results enhance our understanding of the economic forces shaping firms’ internal information environment.

Keywords: trade secret protection, UTSA, internal transparency, enterprise system, information sharing, internal information environment

JEL Classification: D23, D25, M41, M48, K22

Suggested Citation

Andreicovici, Ionela and Bormann, Sara and Hombach, Katharina, Trade Secret Protection and Firms’ Internal Transparency (October 18, 2021). TRR 266 Accounting for Transparency Working Paper Series No. 78, Available at SSRN: https://ssrn.com/abstract=3881395 or http://dx.doi.org/10.2139/ssrn.3881395

Ionela Andreicovici

Frankfurt School of Finance & Management ( email )

Adickesallee, 32-34
32-34
Frankfurt am Main, 60322
Germany

Sara Bormann (Contact Author)

Goethe-University Frankfurt ( email )

Theodor-W.-Adorno-Platz 4
Frankfurt am Main, 60323
Germany

Katharina Hombach

Carl von Ossietzky University of Oldenburg ( email )

Ammerländer Heerstraße 114-118
Oldenburg, 26129
Germany

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