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Title: Protection of Trade Secrets and Capital Structure Decisions

Citation Type: Miscellaneous

Publication Year: 2013

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Abstract: We study whether a firms capital structure decisions are affected by the risk that its rivals in product markets could gain access to its non-patented trade secrets. Our tests exploit the staggered recognition of the Inevitable Disclosure Doctrine (IDD) by U.S. state courts as an exogenous event that increases the protection of a firms trade secrets by reducing the mobility of workers with knowledge of the trade secrets to similar jobs at rival firms. We find that firms increase their financial leverage following the recognition of the IDD, especially those in more competitive industries, those whose workers are more likely to know trade secrets, and those that face greater ex-ante risk of losing key employees to rivals. Also, the credit spread on firms bank loans decreases after the recognition of the IDD, implying that firms default risk is reduced. Finally, the recognition of the IDD is accompanied by gains in market share for firms in recognizing states. Overall, our findings imply that the risk of losing intellectual property to rivals affects a firms default risk, and through this channel, it has a significant impact on the firms financing decisions.

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Authors: Srinivasan, Shweta; Ortiz-Molina, Hernn; Serfling, Matthew A.; Klasa, Sandy

Publisher: University of Arizona

Data Collections: IPUMS USA

Topics: Labor Force and Occupational Structure, Other

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