Money Secrets: How Do Trade Secrets Affect Firm Value? Evidence from a Quasi-Natural Experiment
52 Pages Posted: 18 Sep 2015 Last revised: 8 Jan 2018
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Money Secrets: How Do Trade Secrets Affect Firm Value? Evidence from a Quasi-Natural Experiment
Date Written: September 17, 2015
Abstract
We investigate the impact of trade secrets protection on firm value in the context of the market for corporate control. We propose that a stronger protection of trade secrets, by limiting outflows of trade-secret-related information to both competitors and potential buyers, might have two contrasting effects on a firm’s market value. On one hand, market value may increase because trade secret assets become better protected from rivals and more valuable to the firm. On the other hand, market value may decrease because trade secrets protection will reduce information about the target and its competitors available to potential buyers, increasing uncertainty about the target’s value. Buyers will discount their offers in expectation of being compensated for riskier deals. Using a sample of 1,898 buyouts by private equity firms in the United States, we find that trade secret protection has opposite effects on firm value: (a) a positive effect in industries with high mobility of knowledge workers, and (b) a negative effect in industries that are uncertain and that have a high proportion of “lemons.”
Keywords: trade secrets, firm value, acquisitions
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