Trade Secret Protection and the Integration of Information Within Firms

Abstract

We examine the effect of trade secret protection laws on internal information integration (i.e., the extent to which economic agents are provided with access to decision-relevant information from other economic agents within a firm). We argue that stronger trade secret protection laws increase firms’ internal information integration because they reduce the proprietary costs of information leakage. To test our prediction, we measure a firm’s internal information integration by the share of its sites integrated into its enterprise management system. Exploiting the staggered adoption of trade secret protection laws via the Uniform Trade Secrets Act (UTSA), we find that these laws increase firms’ internal information integration. This effect is stronger (weaker) for firms with higher proprietary costs (coordination benefits). Further, we provide evidence that the UTSA-induced increase in internal information integration translates into improvements of firms’ internal information quality and decision-making quality. Taken together, our results enhance the understanding of the economic trade-offs shaping firms’ internal information environment. This paper was accepted by Ranjani Krishnan, accounting. Funding: S. Bormann and K. Hombach gratefully acknowledge funding from Deutsche Forschungsgemeinschaft (DFG, German Research Foundation) [Grant Project-ID 403041268–TRR 266 Accounting for Transparency]. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2021.03484 .