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

52 Pages Posted: 18 Sep 2015 Last revised: 8 Jan 2018

See all articles by Francesco Castellaneta

Francesco Castellaneta

SKEMA Business School, Université Côte d'Azur (GREDEG)

Raffaele Conti

Bocconi University

Aleksandra Kacperczyk

Massachusetts Institute of Technology (MIT); London Business School

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Date Written: September 17, 2015

Abstract

We investigate the impact of trade secrets protection on firm value in the context of the market for corporate control. We propose that a stronger protection of trade secrets, by limiting outflows of trade-secret-related information to both competitors and potential buyers, might have two contrasting effects on a firm’s market value. On one hand, market value may increase because trade secret assets become better protected from rivals and more valuable to the firm. On the other hand, market value may decrease because trade secrets protection will reduce 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 1,898 buyouts by private equity firms in the United States, we find that trade secret protection has opposite effects on firm value: (a) a positive effect in industries with high mobility of knowledge workers, and (b) a negative effect in industries that are uncertain and that have a high proportion of “lemons.”

Keywords: trade secrets, firm value, acquisitions

Suggested Citation

Castellaneta, Francesco and Conti, Raffaele and Kacperczyk, Aleksandra, Money Secrets: How Do Trade Secrets Affect Firm Value? Evidence from a Quasi-Natural Experiment (September 17, 2015). Available at SSRN: https://ssrn.com/abstract=2661912 or http://dx.doi.org/10.2139/ssrn.2661912

Francesco Castellaneta

SKEMA Business School, Université Côte d'Azur (GREDEG) ( email )

France

Raffaele Conti

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

Aleksandra Kacperczyk (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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