The effect of trade secrets protection on disclosure of forward‐looking financial information

Abstract

Using the recognition of the Inevitable Disclosure Doctrine (IDD) by US state courts as an exogenous shock to the risk of losing trade secrets, this study examines the effects of trade secrets on disclosure of forward-looking financial information. We find that management earnings forecast frequency and forecast horizon increases after the US state where a firm is headquartered starts to recognize IDD. We also find that the effect of IDD recognition on management forecasts is more pronounced for firms that have larger market shares, higher product market competition, more intensive R&D, shorter distance to their industry rivals, and more employees who possess knowledge of the firms' trade secrets.

CEO mobility and corporate payouts

“…Yan Li and Li (2020) find that management earnings forecast horizon and frequency increase after the adoption of IDD.…”

“…Several papers have found that the adoption of IDD has significant economic effects on firm outcomes, such as changes in the capital structure (Klasa et al., 2018), investments (Bai et al., 2020; Qiu & Wang, 2018), disclosure behavior (Ali et al., 2019; Yan Li & Li, 2020), cost structure (F. Gao & Wang, 2018), tax avoidance (N. Li et al., 2022) and merger and acquisition activities (D. Chen et al., 2021). Others have found that IDD has influenced managers’ risk‐taking preferences by altering career concerns, thereby exacerbating agency risk‐related problems (Islam et al., 2020).…”

“…Yan Li and Li (2020) find that management earnings forecast horizon and frequency increase after the adoption of IDD. Thus, it is worth examining whether management earnings guidances are an alternative signal to post‐IDD dividends by testing whether changes in management guidances impact the dividend policy of firms located in IDD states.…”

“…Thus, it is worth examining whether management earnings guidances are an alternative signal to post-IDD dividends by testing whether changes in management guidances impact the dividend policy of firms located in IDD states. We use the Institutional Brokers' Estimate System (IBES) Guidance Detail database to construct two proxies of managerial guidance behavior: the frequency of management earnings per share (EPS) guidances (as in Yan Li & Li, 2020) and the inaccuracy of management EPS guidances. We find that only the inaccuracy (measured as the deviation from actual earnings) of management earnings guidances is significant.…”

“…The treatment and control groups comprise firms headquartered in states that have not adopted IDD by a particular year. We follow the prior studies (Ali et al., 2019; Yan Li & Li, 2020; N. Li et al., 2022; Klasa et al., 2018) and use panel regression techniques that control for firm and industry‐year fixed effects. Based on a sample of US publicly listed companies for the period of 1994–2019, we find that, in general, the adoption of IDD in a given state significantly increases the dividend payouts of firms in the state relative to firms in non‐IDD states.…”