Trade Secret Protection and Firms’ Internal Transparency

64 Pages Posted: 8 Jul 2021

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: July 4, 2021

Abstract

We examine the effects of trade secret protection laws on firms’ internal transparency. We argue that stronger trade secret protection reduces firms’ proprietary costs of information leakage and thus incentivizes firms to integrate, distribute, and share information internally. To test our prediction, we construct a novel proxy of firms’ internal transparency based on the share of sites integrated into a firm’s enterprise system and exploit the staggered adoption of trade secret protection laws via the Uniform Trade Secrets Act (UTSA). 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) of internal transparency. In supplemental tests, we distinguish our proxy from information security and general software investments and refute alternative explanations that trade secret protection laws affect internal transparency primarily via other channels such as firms’ external reporting incentives, innovation 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 (July 4, 2021). 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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