Trade Secrets and Stock Returns

In examining the staggered recognition of the Inevitable Disclosure Doctrine (IDD) as an exogenous shock to trade secret protection, we demonstrate that firms display lower stock returns following the recognition in a difference-indifferences (DID) design. Cross-sectional regression results also confirm the importance of the IDD in returns. In the portfolio sort, firms adopting the IDD exhibit lower risk-adjusted returns than those who do not. Throwing light on the relation between trade secrets and returns, we show that this is more pronounced for firms with highly skilled workers, high management ability, high product market fluidity, and low labor unionization rates.