The Effect of Trade Secrets Law on Stock Price Synchronicity: Evidence from the Inevitable Disclosure Doctrine

The Accounting Review, Forthcoming

57 Pages Posted: 5 Mar 2020

See all articles by Yongtae Kim

Yongtae Kim

Santa Clara University - Leavey School of Business

Lixin (Nancy) Su

Department of Accountancy, Lingnan University

Zheng Wang

City University of Hong Kong

Haibin Wu

City University of Hong Kong (CityUHK)

Abstract

We exploit the staggered recognition of the Inevitable Disclosure Doctrine (IDD) by US state courts to examine the effect of trade-secret protection on the amount of firm-specific information incorporated in stock prices, as reflected in stock price synchronicity. We find that after certain state courts recognize the IDD, firms headquartered in those states exhibit a significant increase in stock price synchronicity relative to firms in other states. We also find a significant decrease in the disclosure of proprietary information in the firms’ 10-K reports. These results suggest that IDD recognition increases the proprietary cost of disclosure, and, in response, corporate managers withhold more information. In addition, we find that the increase in stock price synchronicity and the decrease in the disclosure of proprietary information lead to increases in the firm’s market share, cost of equity, and market-to-book ratio, suggesting that managers sacrifice capital market benefits for product market gains.

Keywords: trade secret law, Inevitable Disclosure Doctrine, stock price synchronicity, proprietary cost of disclosure, information environment

Suggested Citation

Kim, Yongtae and Su, Lixin (Nancy) and Wang, Zheng and Wu, Haibin, The Effect of Trade Secrets Law on Stock Price Synchronicity: Evidence from the Inevitable Disclosure Doctrine. The Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3532092

Yongtae Kim (Contact Author)

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States
(408) 554-4667 (Phone)
(408) 554-2331 (Fax)

Lixin (Nancy) Su

Department of Accountancy, Lingnan University ( email )

8 Castle Peak Road
Lingnan University
Hong Kong, New Territories
China

Zheng Wang

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Haibin Wu

City University of Hong Kong (CityUHK) ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

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