The Effects of Trade Secret Protections on Financial Reporting Opacity: Evidence from a Natural Experiment

Posted: 13 Jul 2016 Last revised: 29 May 2017

See all articles by Feng Guo

Feng Guo

Iowa State University - Department of Accounting and Finance

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Mikhail Pevzner

University of Baltimore - Merrick School of Business

Date Written: July 11, 2016

Abstract

Firms rely on trade secret protections to preserve intellectual property. Using a stylized model, we argue that financial disclosure and trade secret protection are complements: firms release higher quality financial information when trade secret protection is stronger. We find empirical support for our prediction using the staggered passage of trade secret laws across U.S. states via the Uniform Trade Secret Act (UTSA) as a natural experiment. Firms increase earnings quality and have stronger earnings response coefficients following the UTSA passage. Results are stronger for firms in more competitive industries, smaller and higher growth firms, suggesting that firms that faced higher ex-ante proprietary disclosure costs benefit more from trade secret protections and improve their public disclosure.

Keywords: trade secrets, financial reporting opacity

JEL Classification: M40, M41, G3

Suggested Citation

Guo, Feng and Nanda, Vikram K. and Pevzner, Mikhail, The Effects of Trade Secret Protections on Financial Reporting Opacity: Evidence from a Natural Experiment (July 11, 2016). Available at SSRN: https://ssrn.com/abstract=2808144 or http://dx.doi.org/10.2139/ssrn.2808144

Feng Guo

Iowa State University - Department of Accounting and Finance ( email )

College of Business
Ames, IA 50011-2063
United States

Vikram K. Nanda (Contact Author)

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Mikhail Pevzner

University of Baltimore - Merrick School of Business ( email )

1420 N. Charles St.
Baltimore, MD 21201-5779
United States

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