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

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.