Operational Uncertainty and Managerial Incentives in Information Production

Abstract

This paper examines how operational uncertainty affects managerial incentives in information production using the staggered recognition of Inevitable Disclosure Doctrine (IDD) by state courts as a quasi-natural experiment. The adoption of IDD improves the protection of trade secrets by preventing former employees from working for competitor firms and results in exogenous variation in operational uncertainty. We find that after the adoption of IDD by their headquarter states, firms tend to produce more information of higher quality, in the form of more frequent, precise and informative management earnings guidance with longer durations. Furthermore, the results are more pronounced for firms with higher innovation intensity and higher litigation risk. Overall, our findings suggest that operational uncertainty constrains corporate management’s incentives to produce information to outsiders, and better protection of trade secrets due to IDD adoption greatly alleviates this constraint.