Does Trade Secrets Protection Affect Human Capital Investment? Evidence From the Inevitable Disclosure Doctrine

Abstract

This study investigates the impact of trade secrets protection on corporate employment decisions. By exploiting the staggered adoption of the Inevitable Disclosure Doctrine (IDD) by the U.S. state courts as an exogenous shock that significantly reduces employee mobility, we employ a difference-in-differences (DiD) approach and find that the adoption of the IDD, on average, leads to higher deviation from the optimal employment level explained by the underlying economics (i.e., lower labor investment efficiency) for firms headquartered in that state, whilst the rejection of the previously adopted IDD results in lower deviation from the optimal employment level (i.e., higher labor investment efficiency). Further analyses show that the impact of the IDD adoption on corporate employment decisions is primarily driven by firms’ overinvestment in labor, suggesting that firms strategically engage in precautionary human capital hoarding in response to the reduced talent supply in the labor market and consequently higher labor adjustment costs. Our cross-sectional analyses show that the impact of the IDD adoptions on corporate employment decisions is more pronounced for (1) firms in high-skill industries and (2) firms facing high levels of product market competition. Overall, our findings indicate that the trade secrets protection environment can be an influential determinant for labor investment practices and have implications for both policymakers and industry practitioners.