Do trade secrets predict returns? Evidence from the Inevitable Disclosure Doctrine

We exploit the staggered state-level adoption of the Inevitable Disclosure Doctrine (IDD) as an exogenous shock to trade secret protection to identify its causal impact on stock returns. Using difference-in-differences methodology, we find that firms headquartered in IDD-adopting states experience significantly lower returns than those in non-adopting states. This negative effect is robust to extensive controls and alternative specifications. The IDD effect is more pronounced for firms with high idiosyncratic risk, elevated employee mobility, strong labor unionization, financial constraints, greater product market fluidity, and more R&D expenditures. Fama–MacBeth regressions confirm that IDD exposure predicts returns after controlling for established determinants. Portfolio analysis reveals that firms subject to IDD protection generate lower risk-adjusted returns across multiple asset pricing models, including the Fama–French five-factor model, momentum-augmented and liquidity-augmented specifications, and the q-factor model. The Bayesian redundancy test indicates that the IDD factor appears to carry incremental information beyond conventional pricing models. This is consistent with the notion that trade secret protection represents a relevant, albeit perhaps modest, factor in the cross-section of stock returns.