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Actively Keeping Secrets From Creditors: Evidence From the Uniform Trade Secrets Act

Published online by Cambridge University Press:  15 February 2022

Scott Guernsey ,
Kose John  and
Lubomir P. Litov Open the ORCID record for Lubomir P. Litov [Opens in a new window]
Scott Guernsey
Affiliation:
University of Tennessee Haslam College of [email protected]
Kose John
Affiliation:
New York University Stern School of [email protected]
Lubomir P. Litov*
Affiliation:
University of Oklahoma Price College of Business and the College of Law and University of Pennsylvania Wharton Financial Institutions Center
*
[email protected] (corresponding author)
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Abstract

We find that an increase in a firm’s incentives to use trade secrets to protect its intellectual property results in a more actively managed capital structure. Exploiting U.S. states’ adoption of the Uniform Trade Secrets Act as a positive “shock” in the protection afforded to trade secrets, we find that firms covered by the Act reduce debt levels while increasing investments in intangibles. Additional tests suggest that firms fund these financing and investment activities by issuing more equity. Consistent with an increase in overall intangibility magnifying contracting problems with creditors, we find that covered firms experience higher costs of debt.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 7 , November 2022 , pp. 2516 - 2558
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We thank Yakov Amihud, Tor-Erik Bakke, Gustaf Bellstam (discussant), Martijn Cremers, Philip Dybvig, Louis Ederington, Adelphe Ekponon, Chitru Fernando, Alfonso Gambardella, Vidhan Goyal, Dennis Hamilton (discussant), Jarrad Harford (the editor), Yael Hochberg, Xiaoyan Hu, Stacey Jacobsen, Pab Jotikasthira, Bart Lambrecht, Gabriele Lattanzio, James Linck, Scott Linn, Peter MacKay, William Mann (the referee), Gustavo Manso, William Maxwell, William Megginson, Darius Miller, Mitchell Petersen (discussant), Ivan Png, Leonid Pugachev, Raluca Roman (discussant), Matthew Serfling, Duane Stock, Wayne Thomas, Giovanni Valentini, David Wehrheim, Wei Wei, Geoff Whittington, Steven Xiao, Hui Xu, David Yermack, Linghang Zeng (discussant), and seminar participants at the NYU Pollack Center Corporate Governance Luncheon, Southern Methodist University, the University of Cambridge, the University of Oklahoma, and conference participants at the American Finance Association Meeting, the KWC Conference on Entrepreneurial Finance, the Strategy, Entrepreneurship, and Innovation Faculty Workshop, the Financial Management Association Meeting, the Southwestern Finance Association Meeting, and the European Financial Management Association Meeting for helpful comments and discussions. Analyses were derived based in part on data from Nielsen Consumer LLC and marketing databases provided through the NielsenIQ data sets at the Kilts Center for Marketing Data Center at The University of Chicago Booth School of Business. The conclusions drawn from the NielsenIQ data are our own and do not reflect the views of NielsenIQ. NielsenIQ is not responsible for, had no role in, and was not involved in analyzing and preparing the results reported herein. Guernsey acknowledges financial support from the Cambridge Endowment for Research in Finance.

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