Trade Secret Protection and Firms’ Internal Transparency
64 Pages Posted: 8 Jul 2021
Date Written: July 4, 2021
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: Suggested Citation