Mandatory Environmental Disclosure with Options to Withhold Trade Secrets

Abstract

Mandatory environmental disclosure programs allow firms to withhold environmental information when the information contains proprietary knowledge and constitutes a trade secret. The public concern is that firms may misuse this exemption rule to hide non-proprietary environmental information. Examining the mandatory chemical disclosure program in the fracking industry, I find evidence of opportunistic withholding of information among operators that are less likely to have trade secrets. Specifically, I focus on within-operator variation and show that operators hide fewer chemicals as trade secrets when the operating site is in close proximity to water quality monitors. Further analyses suggest that operators are concerned about external environmental monitoring, which deters them from opportunistic information withholding. I find limited evidence of such opportunistic behavior among operators that are more likely to have trade secrets. This paper presents the first empirical evidence that firms may use trade secret exemption as an avoidance strategy in mandatory environmental disclosure programs.

Keywords: Mandatory Environmental Disclosure, Reporting Regulation, Innovation, Pollution, Trade Secret, Avoidance Strategy, Environmental Monitoring, Fracking

JEL Classification: K22, K32, L71, L72, M41, M48, Q58