No. 78: Trade secret protection and the integration of information within firms

Abstract

We examine the effect of trade secret protection laws on internal information integration, i.e., the extent to which economic agents are provided with access to decision-relevant information from other economic agents within a firm. We argue that stronger trade secret protection laws increase firms’ internal information integration because they reduce proprietary costs of information leakage. To test our prediction, we measure firms’ internal information integration based on the share of their sites integrated into an enterprise management system (EMS). Exploiting the staggered adoption of trade secret protection laws via the Uniform Trade Secrets Act (UTSA), we find that these laws increase firms’ internal information integration. This effect is stronger (weaker) for firms with more pronounced proprietary costs (coordination benefits). Further, we provide evidence that the UTSA-induced increase in internal information integration translates into improvements in firms’ internal information quality and decision-making quality. Finally, we find that trade secret protection laws also increase firms’ information integration via technology other than EMS. Taken together, our results enhance our understanding of the economic trade-offs shaping firms’ internal information environment.