Trade secrets protection and stock price crash risk. Issue 2 (23rd November 2022)

• Record Type: Journal Article
• Authors: Hu, Dan; Lee, Eunju; Li, Bingxin
• Is Part Of: Financial review. Volume 58:Issue 2(2023)
• Page Start: 395
• Page End: 421
• Publication Date: 2022-11-23
• Subjects: information asymmetry -- investment inefficiency -- stock price crash risk -- trade secrets protection; Finance -- United States -- Periodicals; Finance -- Periodicals; 332
• DOI: 10.1111/fire.12330
• Languages: English
• ISSNs: 0732-8516

Abstract

Abstract: This paper provides evidence that the trade secrets protection increases stock price crash risk. Using a quasi‐experimental setting with the Uniform Trade Secrets Act (UTSA), we find that firms headquartered in states adopting the UTSA tend to have higher stock price crash risk. The results are robust to controlling for other trade secrets laws and the choice of crash risk measures, and they are more pronounced in small firms and firms with high market‐to‐book and low leverage ratios. A detailed mechanism analysis reveals that increased crash risk following the UTSA is attributed to an opaque information environment and investment inefficiency.