Money Secrets : How Do Trade Secrets Affect Firm Value? Evidence from a Quasi-Natural Experiment

We investigate the impact of trade secret legal protection on firm value in the context of acquisitions. On one hand, market value may increase because trade secret assets become better protected from rivals. On the other hand, market value may decrease because trade secret protection reduces 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 private equity investments in the United States, we find that trade secret protection has a positive effect in industries with high mobility of knowledge workers, and a negative effect in industries with high uncertainty and a high proportion of “lemons.”