Trade Secret Impairments

Abstract

Intangible capital plays a crucial role in economic growth and impacts firm value. Trade secrets form a key component of intangible capital, yet little is known about their market value. Using a hand-collected sample of U.S. court cases on trade secret impairments filed under the Economic Espionage Act, we provide an economically and statistically significant estimate of trade secrets' value; approximately 1.33-1.74% of firm market capitalization corresponding to the average value loss of $1.6-2.1 billion. Aggregating across all firms in our sample, the total loss in market value amounts to more than $190 billion in the first 30 trading days after the event, over the period 1996 to 2019. Firms more likely to suffer a trade secrets impairment are large, with lower leverage, and with higher-value patents. In the three-year period after the impairment, victim firms respond by acquiring other smaller firms, as a potential attempt to reduce losses associated with the impairment.

Keywords: Trade Secret Impairment, Intangible Capital JEL Classification: G14