Protection of Proprietary Information and Voluntary Disclosure: Evidence from State Trade Secrets Laws

• In Event: Disclosure Regulation

Abstract

Using U.S. state courts’ recognition of the Inevitable Disclosure Doctrine (IDD) as an exogenous shock to firms’ proprietary costs of disclosure, we examine its effect on voluntary disclosure. We find that the frequency and horizon of firms’ annual earnings forecasts increase after the state in which the firm’s headquarters is located recognizes IDD. This finding is robust to alternative research designs that consider reverse causality and confounding local economy shocks. Cross-sectional analyses indicate that the effect of IDD recognition on management forecasts is more pronounced for firms with intensive R&D activities, superior sales and profits, and more employees likely to know the firm’s trade secrets. Further, we find that after the recognition of IDD, management earnings forecasts are more informative and firms’ information environment is improved. Overall, our findings suggest that when the proprietary costs of disclosure are reduced by better protection of trade secrets, firms disclose more forward-looking information.

Authors

• Dan S Dhaliwal, University of Arizona-Tucson

• Yan Li, National University of Singapore

• Yutao Li, University of Lethbridge