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

Yongtae KIM*, Lixin Nancy SU, Zheng WANG, Haibin WU

*Corresponding author for this work

Research output: Journal PublicationsJournal Article (refereed)peer-review

70 Citations (Scopus)

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.
Original languageEnglish
Pages (from-to)325-348
Number of pages24
JournalThe Accounting Review
Volume96
Issue number1
Early online date27 Feb 2020
DOIs
Publication statusPublished - Jan 2021

Bibliographical note

Publisher Copyright:
© 2021 American Accounting Association. All rights reserved.

Keywords

  • Inevitable disclosure doctrine
  • Information environment
  • Proprietary cost of disclosure
  • Stock price synchronicity
  • Trade secrets law

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