Three essays on spillover effects of legal protection of trade secrets: evidence from the U.S. inevitable disclosure doctrine (IDD)

<p dir="ltr">Against the backdrop of the United States (U.S.) state courts’ staggered adoption of the inevitable disclosure doctrine (IDD) over the sample period from 1993 to 2019, this thesis employs a difference-in-differences (DiD) design to investigate whether the legal protection of trade secrets bestowed on firms in the IDD-endorsing states has a spillover effect on investment, trade credit, and vertical integration decisions of their major competitors outside these states.</p><p dir="ltr">Essay One, presented in Chapter Four, reveals that firms outside the IDD-endorsing states decrease their investments when their rival firms gain stronger legal protection of trade secrets. These firms’ decreased investment is possibly due to heightened talent shortages, competitive threats, or information opacity. Furthermore, Essay One reveals that a high level of a firm’s market power mitigates the negative spillover effect of the rivals’ trade secret protection on its investments, while a high level of investment friction strengthens the effect. The main result is consistent after a set of sensitivity tests. Furthermore, additional analysis suggests that IDD adoption by the state of a rival firm(s) reduces firms’ investment efficiency, and this effect is particularly caused by underinvestment.</p><p dir="ltr">Building on the findings of Essay One, Essay Two (Chapter Five) investigates how rivals’ trade secret protection can affect the trade credit of firms outside the IDD-endorsing states. The finding of Essay Two shows that firms experience a decrease in trade credit when their major rivals gain stronger legal protection of trade secrets resulting from the state’s adoption of the IDD. The main result is robust to the parallel trends assumption test and placebo tests. Building on trade credit theory, this essay further tests possible mechanisms that are attributable to the phenomenon based on the perspectives of trade credit’s demand and supply. The tests reveal that the decline in firms’ trade credit is possibly caused by the decrease in their demand for capital and/or their weakened bargaining power in the supply chain. Furthermore, the negative spillover impact of rivals’ enhanced trade secret protection on these firms’ trade credit is attenuated among mature firms and those with superior credit ratings. The main result is robust to a set of sensitivity tests.</p><p dir="ltr">Motivated by the weakened bargaining power and reduced trade credit observed in Essay Two, Essay Three (Chapter Six) examines whether firms outside the IDD-endorsing states adopt vertical integration strategies. It finds an increase in vertical integration among firms after their rivals obtain enhanced trade secret protection bestowed by the IDD. The main finding is validated by a series of robustness tests. In addition, firms’ engagement in vertical integration is possibly driven by weakened bargaining power in the supply chain as well as reduced innovation efficiency resulting from the restriction on talent movement— a by-product of the IDD adoption. Furthermore, the main effect is more pronounced when firms pursue an innovation strategy and/or when the industry competition is low. The main result is robust to a set of sensitivity tests. Further analysis suggests that adopting a vertical integration strategy improves the financial performance of the firms outside the IDD-endorsing states.</p>