Trade Secret Protection and Firms’ Internal Transparency

We examine the effect of trade secret protection laws on firms’ internal transparency. We argue that stronger trade secret protection reduces firms’ proprietary costs of information leakage and thus incentivizes firms to integrate, distribute, and share information internally. To test our prediction, we construct a novel proxy of firms’ internal transparency based on the share of sites integrated into a firm’s enterprise system and exploit the staggered adoption of trade secret protection laws via the Uniform Trade Secrets Act (UTSA). We find that stronger trade secret protection increases firms’ internal transparency, and that the effect is stronger (weaker) for firms with greater proprietary costs (coordination benefits) of internal transparency. In supplemental tests, we further document that our proxy for internal transparency captures a specific dimension of firms’ internal information environment and refute alternative explanations that trade secret protection laws affect internal transparency primarily via other channels such as firms’ external reporting incentives, innovation incentives, or reduced financial constraints. Taken together, our results enhance our understanding of the economic forces shaping firms’ internal information environment.