Abstract
We utilize the staggered adoption of the Inevitable Disclosure Doctrine (IDD) by U.S. state courts as an exogenous shock to the proprietary costs of disclosure and study the impact of the IDD on corporate financial reporting policy. We find compelling evidence that firms headquartered in states that adopt the IDD exhibit a significant increase in financial reporting opacity relative to firms headquartered in states that fail to adopt the IDD. Our finding is robust to a battery of sensitivity tests. Cross-sectional evidence shows that the impact of the IDD on opacity is more pronounced for firms with weak external monitoring. Further, our path analysis shows that financial reporting opacity engendered by the adoption of the IDD had broad negative consequences for capital market investors.
| Original language | English |
|---|---|
| Article number | 101641 |
| Journal | Journal of Corporate Finance |
| Volume | 64 |
| DOIs | |
| Publication status | Published - Oct 2020 |
Bibliographical note
Funding Information:The IDD empowers employers with the legal right to prevent former employees from working for competitors if this would “inevitably” result in competitor exploitation of the employees' knowledge of trade secrets (Kahnke et al., 2008; Wiesner, 2012). The Restatement (Third) of Unfair Competition (1995) defines trade secrets as “any information that can be used in the operation of a business or other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over others.” The IDD is applicable even if the employee did not sign a non-compete or non-disclosure agreement, there is no proof of bad faith or actual misbehavior, or the competitor is located in another state whose courts have not adopted/or indeed rejected the IDD.5 In the U.S., lawsuits related to employment contracts are filed in the context of employment law. Thus, the relevant jurisdiction for a lawsuit seeking to protect a firm's trade secrets when employees switch employers is typically the state where the former employee worked (e.g., Malsberger, 2004; Garmaise, 2011). Thus, the IDD protects firms' trade secrets even if the new employer is located in a state where the IDD has not been adopted. A survey sponsored by PricewaterhouseCoopers, the U.S. Chamber of Commerce and the ASIS Foundation (2002) estimates that annual losses to U.S. firms from the divulgence of their trade secrets is over $50 billion.
Publisher Copyright:
© 2020 Elsevier B.V.
ASJC Scopus Subject Areas
- Business and International Management
- Finance
- Economics and Econometrics
- Strategy and Management