Trade Secrets Protection and Stock Price Crash Risk

Abstract

This paper examines the effect of trade secrets protection on stock price crash risk. Using an experimental setting with the Uniform Trade Secrets Act (UTSA), we find that firms headquartered in states with 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 analysis of economic mechanisms reveals that increased crash risk for firms under the UTSA could be primarily associated with higher information asymmetry, low reporting quality, and more negative news withheld following the UTSA. Overall, our results highlight that trade secrets protection leads to the unexpected, negative consequence of elevated stock price crash risk.