Safeguarding Secrets, Shaping Acquisitions: Trade Secret Protection and the Role of Distance Between Acquirer and Target

Arroyabe, Marta; Grimpe, Christoph; HUSSINGER, Katrin

doi:10.1287/stsc.2023.0066

Article (Scientific journals)

Safeguarding Secrets, Shaping Acquisitions: Trade Secret Protection and the Role of Distance Between Acquirer and Target

Arroyabe, Marta; Grimpe, Christoph; HUSSINGER, Katrin

2025 • In Strategy Science, 10 (2), p. 148 - 165

Peer Reviewed verified by ORBi

Permalink
https://hdl.handle.net/10993/67893

DOI
10.1287/stsc.2023.0066

Files (1)Send to Details Statistics Bibliography Similar publications

Files

Full Text

The article is available here.docx

Author postprint (13.37 kB)

Download

All documents in ORBilu are protected by a user license.

Send to

RIS BibTex APA Chicago Permalink X Linkedin

Details

Keywords :

distance; firm acquisitions; ownership stakes; trade secret protection; Uniform Trade Secrets Act (UTSA); Business and International Management; Strategy and Management; Management Science and Operations Research; Management of Technology and Innovation

Abstract :

[en] We investigate whether strengthened legal protection of trade secrets increases the likelihood of a firm being acquired. Stronger protection can make a firm more attractive for acquisition because of better safeguarding of trade secrets, but it may also increase information asymmetries that discourage potential acquirers. Using the staggered implementation of the Uniform Trade Secrets Act in the United States, we show that stronger trade secret protection increases the likelihood of being acquired but also changes firms’ acquisition strategies more broadly depending on the distance between acquirer and target. Compared with domestic acquirers, foreign acquirers are only half as likely to make an acquisition, and they prefer to acquire minority rather than majority stakes. Both domestic and foreign acquirers are more likely to pursue stepwise acquisitions of a target as protection increases, consistent with a real options rationale. Further investigation suggests that, whereas increased trade secret protection increases information asymmetries for all acquirers, foreign acquirers as well as domestic acquirers located further away from a target are disproportionately affected.

Disciplines :

Strategy & innovation

Author, co-author :

Arroyabe, Marta ; Essex Business School, University of Essex, Southend-on-Sea, United Kingdom

Grimpe, Christoph ; Department of Strategy and Innovation, Copenhagen Business School, Frederiksberg, Denmark ; Leibniz Centre for European Economic Research, Mannheim, Germany

HUSSINGER, Katrin ; University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Department of Economics and Management (DEM) ; Leibniz Centre for European Economic Research, Mannheim, Germany ; Department of Management, Strategy and Innovation, Catholic University of Leuven, Leuven, Belgium

External co-authors :

yes

Language :

English

Title :

Safeguarding Secrets, Shaping Acquisitions: Trade Secret Protection and the Role of Distance Between Acquirer and Target

Publication date :

June 2025

Journal title :

Strategy Science

ISSN :

2333-2050

eISSN :

2333-2077

Publisher :

INFORMS Inst.for Operations Res.and the Management Sciences

Volume :

Issue :

Pages :

148 - 165

Peer reviewed :

Peer Reviewed verified by ORBi

Additional URL :

https://pubsonline.informs.org/doi/pdf/10.1287/stsc.2023.0066

Available on ORBilu :

since 03 March 2026

Statistics

Number of views

45 (1 by Unilu)

Number of downloads

9 (0 by Unilu)

More statistics

Scopus citations^®

Scopus citations^®
without self-citations

OpenCitations

OpenAlex citations

WoS citations^™

Bibliography

Specifically, we interviewed two M&A managers working at a large multinational technology company and an energy company, two M&A consultants from a global consulting firm, and one financial adviser on M&A deals from a multinational bank, all with considerable experience in M&A transactions. The interviews lasted between 30 minutes and one hour.
The UTSA has not been adopted by the states of North Carolina and New York whose own legislation, however, is very similar to the act (Klasa et al. 2018).
The match relies on firm identifiers (CUSIP and PERMNO, from the Center for Research in Security Prices database).
For most firms, R&D facilities, where many trade secrets are held, are collocated with the headquarters (Malecki 1980). For some firms, the location of the R&D and the firm’s headquarters may indeed not coincide. Such a discrepancy is unlikely to affect results (Li et al. 2018), which we believe to hold in our context for four reasons. First, trade secrets coverage goes beyond R&D outcomes, including marketing or technical data and manufacturing expertise. These are likely located at the firm’s headquarters. Even if not, accounting for the firm’s R&D location would not allow us to trace the location of those trade secrets. Second, when selecting the state’s law that governs a dispute, courts often favor the state with the most significant relation to the dispute, which typically is the headquarters’ location. Third, the headquarters’ state is relevant because of “the law of the place where the contract is made” principle in labor laws (Pollard 2014). Fourth, firms can designate the law of the headquarters’ state as the applicable law using either the “choice of law provision” in employment contracts (Steinmeyer and Freeman 2016) or the “choice of forum provision”. Hence, we are confident that the matching of firms to their headquarters’ state is appropriate.
M&A databases typically do not indicate whether an acquisition could be considered a merger of equals, but they always designate one firm the role of the acquirer and another the role of the target, indicating the stake acquired. In fact, prior research questions whether a true merger of equals exists. Based on the definition that a merger of equals entails an approximately equal value contribution from both firms to the merged entity, less than 0.05% (0.10%) of all transactions from 1985 to 2001 in Europe (the United States) could be classified as mergers of equals (Zaheer et al. 2003). The label “merger of equals” is rather used to communicate the transaction to anxious stakeholders, particularly the employees of the “weaker” partner.
The index is constructed based on a survey of the state laws surrounding CNCs (Malsberger 2004). A total of 12 questions (e.g., burden of proof, geographic restrictions, and damages) is used to evaluate CNC enforceability.
Note that we exclude other types of acquisitions when we focus on a specific type of acquisition in our dependent variable, for example, we drop observations for majority acquisitions when our dependent variable depicts minority acquisitions. Hence, the number of observations is different in each column.
The estimated coefficients are significantly different for domestic and foreign acquisitions (F = 27.60***), domestic and foreign majority acquisitions (F = 284.19***), domestic majority and domestic minority acquisitions (F = 57.54***), and foreign majority and foreign minority acquisitions (F = 6.49**). The difference between domestic and foreign minority acquisitions is not statistically significant (F = 0.41). *p < 0.1, **p < 0.05, ***p < 0.01.
The WGI are composed of the following dimensions: voice and accountability, political stability and absence of violence/terrorism, government effectiveness, regulatory quality, rule of law, and control of corruption.
We employ the following formula: IDj = √∑i=16(Iij - IiU)2, where IDj is the institutional distance for the ith country, Iij is the WGI’s score for the ith governance dimension for the jth country, and U indicates the United States.
Note that, here, we do not restrict the sample to the firms that were observed before and after the UTSA at least once, and we do not restrict the sample to the matched firms only because both requirements were solely imposed for reasons of causal interpretation of our main results, whereas, here, we present descriptive evidence. We keep the 13-year time window.
Online Table A11 shows the results for stepwise acquisitions by domestic acquirers for which we distinguish between same/different and neighboring/nonneighboring state stepwise acquisitions. We find that the share of stepwise acquisitions increases markedly after the UTSA when the target is located in a different neighboring or nonneighboring state but not when acquirer and target are located in the same state. Online Table A12 shows the average number of steps for acquisitions with an initial minority stake. We find that, even though the average number of steps increases slightly for different and neighboring state acquisitions after the UTSA, the differences are not statistically significant.
Online Tables A16 and A17 show the results for medium-sized and large sample splits, respectively.
We estimate a two-way fixed effects model for the nontreated, in our case, the never-treated observations only. The predictions are then extrapolated to the treated observations, and the treatment effect for each treated observation is calculated as the observed outcome minus the predicted outcome from the first stage regression for the nontreated observations and averaged for the sample of the treated firms. We allow for a one-year aspiration lag. Because this is an estimation using the nontreated observations only and the prediction therefrom is core to this approach, we include the firms that have been observed only before the law change in this regression and an otherwise unchanged sample.
Aggarwal VA, Hsu DH (2014) Entrepreneurial exits and innovation. Management Sci. 60(4):867–887.
Ahuja G, Katila R (2001) Technological acquisitions and the innovation performance of acquiring firms: A longitudinal study. Strategic Management J. 22(3):197–220.
Akerlof GA (1970) The market for “lemons”: Quality uncertainty and the market mechanism. Quart. J. Econom. 84(3):488–500.
Allen JW, Phillips GM (2000) Corporate equity ownership, strategic alliances, and product market relationships. J. Finance 55(6): 2791–2815.
Almeling DS (2012) Seven reasons why trade secrets are increasingly important. Berkeley Tech. Law J. 27(2):1091–1117.
Anderson E, Gatignon H (1986) Modes of foreign entry: A transaction cost analysis and propositions. J. Internat. Bus. Stud. 17(3): 1–26.
Arundel A (2001) The relative effectiveness of patents and secrecy for appropriation. Res. Policy 30(4):611–624.
Baker AC, Larcker DF, Wang CCY (2022) How much should we trust staggered difference-in-differences estimates? J. Financial Econom. 144(2):370–395.
Barney JB (1986) Strategic factor markets. Expectations, luck, and business strategy. Management Sci. 32(10):1231–1241.
Bertrand M, Duflo E, Mullainathan S (2004) How much should we trust differences-in-differences estimates? Quart. J. Econom. 119(1):249–275.
Besen SM, Raskind LJ (1991) An introduction to the law and economics of intellectual property. J. Econom. Perspect. 5(1):3–27.
Boeh KK (2011) Contracting costs and information asymmetry reduction in cross-border M&A. J. Management Stud. 48(3):568–590.
Borusyak K, Jaravel X, Spiess J (2024) Revisiting event-study designs: Robust and efficient estimation. Rev. Econom. Stud. Forthcoming.
Brealey RA, Myers SC (2000) Principles of Corporate Finance, 6th ed. (Irwin/McGraw-Hill, Boston).
Cassiman B, Colombo MG, Garrone P, Veugelers R (2005) The impact of M&A on the R&D process: An empirical analysis of the role of technological- and market-relatedness. Res. Policy 34(2):195–220.
Castellaneta F, Conti R, Kacperczyk A (2017) Money secrets: How does trade secret legal protection affect firm market value? Evidence from the Uniform Trade Secret Act. Strategic Management J. 38(4):834–853.
Castellaneta F, Conti R, Kacperczyk A (2020) The (un) intended consequences of institutions lowering barriers to entrepreneurship: The impact on female workers. Strategic Management J. 41(7): 1274–1304.
Cengiz D, Dube A, Lindner A, Zipperer B (2019) The effect of minimum wages on low-wage jobs. Quart. J. Econom. 134(3): 1405–1454.
Chen S-FS (2008) The motives for international acquisitions: Capability procurements, strategic considerations, and the role of ownership structures. J. Internat. Bus. Stud. 39(3):454–471.
Chen D, Gao H, Ma Y (2021) Human capital-driven acquisition: Evidence from the Inevitable Disclosure Doctrine. Management Sci. 67(8):4643–4664.
Chondrakis G (2016) Unique synergies in technology acquisitions. Res. Policy 45(9):1873–1889.
Chondrakis G, Serrano CJ, Ziedonis RH (2021) Information disclosure and the market for acquiring technology companies. Strategic Management J. 42(5):1024–1053.
Clougherty JA, Zhang N (2020) Foreign investor reactions to risk and uncertainty in antitrust: U.S. merger policy investigations and the deterrence of foreign acquirer presence. J. Internat. Bus. Stud. 52(3):454–478.
Coff RW (1999) How buyers cope with uncertainty when acquiring firms in knowledge-intensive industries: Caveat emptor. Organ. Sci. 10(2):144–161.
Cohen WM, Levinthal DA (1989) Innovation and learning: The two faces of R&D. Econom. J. (London) 99(397):569–596.
Cohen WM, Nelson RR, Walsh JP (2000) Protecting their intellectual assets: Appropriability conditions and why U.S. manufacturing firms patent (or not). NBER Working Paper No. 7552, National Bureau of Economic Research, Cambridge, MA.
Contigiani A, Hsu DH, Barankay I (2018) Trade secrets and innovation: Evidence from the “Inevitable Disclosure” Doctrine. Strategic Management J. 39(11):2921–2942.
Cunningham J, Goodman-Bacon A (2024) Changes in family structure and welfare participation since the 1960s: The role of legal services. Amer. Econom. J. Appl. Econom. Forthcoming.
Dube S, Zhu C (2021) The disciplinary effect of social media: Evidence from firms’ responses to Glassdoor reviews. J. Accounting Res. 59(5):1783–1825.
Eberhart RN, Eesley CE, Eisenhardt KM (2017) Failure is an option: Institutional change, entrepreneurial risk, and new firm growth. Organ. Sci. 28(1):93–112.
Ertimur Y, Rawson C, Rogers JL, Zechman SLC (2018) Bridging the gap: Evidence from externally hired CEOs. J. Accounting Res. 56(2):521–579.
Falaster C, Ferreira MP, Li D (2021) The influence of generalized and arbitrary institutional inefficiencies on the ownership decision in cross-border acquisitions. J. Internat. Bus. Stud. 52(9): 1724–1749.
Flammer C (2015) Does product market competition foster corporate social responsibility? Evidence from trade liberalization. Strategic Management J. 36(10):1469–1485.
Flammer C, Kacperczyk AJ (2016) The impact of stakeholder orientation on innovation: Evidence from a natural experiment. Management Sci. 62(7):1982–2001.
Fontana R, Nuvolari A, Shimizu H, Vezzulli A (2013) Reassessing patent propensity: Evidence from a data set of R&D awards, 1977–2004. Res. Policy 42(10):1780–1792.
Garmaise MJ (2011) Ties that truly bind: Noncompetition agreements, executive compensation, and firm investment. J. Law Econom. Organ. 27(2):376–425.
Gehrig T (1993) An information based explanation of the domestic bias in international equity investment. Scandinavian J. Econom. 95(1):97–109.
Giroud X, Mueller HM (2010) Does corporate governance matter in competitive industries? J. Financial. Econom. 95(3):312–331.
Grimpe C, Hussinger K (2014) Resource complementarity and value capture in firm acquisitions: The role of intellectual property rights. Strategic Management J. 35(12):1762–1780.
Hall BH, Helmers C, Rogers M, Sena V (2014) The choice between formal and informal intellectual property: A review. J. Econom. Literature 52(2):1–50.
Henderson R, Cockburn I (1994) Measuring competence? Exploring firm effects in pharmaceutical research. Strategic Management J. 15(8):63–84.
Henisz WJ (2000) The institutional environment for multinational investment. J. Law Econom. Organ. 16(2):334–364.
Iacus SM, King G, Porro G, Katz JN (2012) Causal inference without balance checking: Coarsened exact matching. Political Anal. 20(1):1–24.
Jorda KF (2008) Patent and trade secret complementariness: An unsuspected synergy. Washburn Law J. 48:1–32.
Kaiser U, Kongsted HC, Laursen K, Ejsing A-K (2018) Experience matters: The role of academic scientist mobility for industrial innovation. Strategic Management J. 39(7):1935–1958.
Kim JD (2023) Startup acquisitions as a hiring strategy: Turnover differences between acquired and regular hires. Strategy Sci. 9(2):118–134.
Kim D, Linton K, Semanik M (2016) U.S. International Trade Commission’s trade secrets roundtable: Discussion summary. J. Internat. Commerce Econom. 1–13.
Klasa S, Ortiz-Molina H, Serfling M, Srinivasan S (2018) Protection of trade secrets and capital structure decisions. J. Financial Econom. 128(2):266–286.
Kogan L, Papanikolaou D, Seru A, Stoffman N (2017) Technological innovation, resource allocation, and growth. Quart. J. Econom. 132(2):665–712.
Kogut B (1991) Joint ventures and the option to expand and acquire. Management Sci. 37(1):19–33.
Kogut B, Zander U (1992) Knowledge of the firm, combinative capabilities and the replication of technology. Organ. Sci. 33(3):383–397.
Lahiri S, Elango B, Kundu SK (2014) Cross-border acquisition in services: Comparing ownership choice of developed and emerging economy MNEs in India. J. World Bus. 49(3):409–420.
Lemley MA (2008) The surprising virtues of treating trade secrets as IP rights. Stanford Law Rev. 61(2):311–353.
Lepak DP, Smith KG, Taylor MS (2007) Value creation and value capture: A multilevel perspective. Acad. Management Rev. 32(1): 180–194.
Levin RC, Klevorick AK, Nilson RR, Winter SG (1987) Appropriating the returns from industrial research and development. Brookings Papers Econom. Activity 3:783–831.
Li Y, Lin Y, Zhang L (2018) Trade secrets law and corporate disclosure: Causal evidence on the proprietary cost hypothesis. J. Accounting Res. 56(1):265–308.
Liebeskind JP (1997) Keeping organizational secrets: Protective institutional mechanisms and their costs. Indust. Corporate Change 6(3):623–663.
Liesch PW, Welch LS, Buckley PJ (2011) Risk and uncertainty in internationalisation and international entrepreneurship studies. Management Internat. Rev. 51(6):851–873.
Makino S, Delios A (1996) Local knowledge transfer and performance: Implications for alliance formation in Asia. J. Internat. Bus. Stud. 27(5):905–927.
Malecki EJ (1980) Dimensions of R&D location in the United States. Res. Policy 9(1):2–22.
Malhotra S, Gaur AS (2013) Spatial geography and control in foreign acquisitions. J. Internat. Bus. Stud. 45(2):191–210.
Malsberger B (2004) Covenants Not to Compete: A State-by-State Survey (BNA Books, Washington, DC).
Marcus M, Sant’Anna PHC (2021) The role of parallel trends in event study settings: An application to environmental economics. J. Assoc. Environ. Resources Econom. 8(2):235–275.
Markman GD, Espina MI, Phan PH (2004) Patents as surrogates for inimitable and non-substitutable resources. J. Management 30(4): 529–544.
Marx M, Strumsky D, Fleming L (2009) Mobility, skills, and the Michigan non-compete experiment. Management Sci. 55(6):875–889.
Meyer KE, Estrin S, Bhaumik SK, Peng MW (2009) Institutions, resources, and entry strategies in emerging economies. Strategic Management J. 30(1):61–80.
Mezias JM (2002) Identifying liabilities of foreignness and strategies to minimize their effects: The case of labor lawsuit judgement in the United States. Strategic Management J. 23(3):229–244.
Nain A, Wang Y (2018) The product market impact of minority stake acquisitions. Management Sci. 64(2):825–844.
Ng W, Stuart TE (2022) Acquired employees vs. hired employees: Retained or turned over? Strategic Management J. 43(5):1025–1045.
Ouimet PP (2013) What motivates minority acquisitions? The tradeoffs between a partial equity stake and complete integration. Rev. Financial Stud. 26(4):1021–1047.
Paruchuri S, Nerkar A, Hambrick DC (2006) Acquisition integration and productivity losses in the technical core: Disruption of inventors in acquired companies. Organ. Sci. 17(5):545–562.
Png IPL (2017a) Law and innovation: Evidence from state trade secrets laws. Rev. Econom. Statist. 99(1):167–179.
Png IPL (2017b) Secrecy and patents: Theory and evidence from the Uniform Trade Secrets Act. Strategy Sci. 2(3):176–193.
Png IPL, Samila S (2015) Trade secrets law and mobility: Evidence from ‘inevitable disclosure’. Preprint, submitted February 14, http://dx.doi.org/10.2139/ssrn.1986775.
Pollard J (2014) Choice of law has huge consequences, especially in NC non-compete case. The Non-Compete Blog (August 29), https://thenoncompeteblog.com/2014/08/29/choice-of-law-hashuge-consequences-especially-in-nc-non-compete-case/.
Pooley J (1997) Trade Secrets (Law Journal Press, New York).
Reuer JJ, Ragozzino R (2008) Adverse selection and M&A design: The roles of alliances and IPOs. J. Econom. Behav. Organ. 66(2): 195–212.
Risch M (2007) Why do we have trade secrets? Marquette Intellectual Property Law Rev. 11(1):1–76.
Roth J (2022) Pretest with caution: Event-study estimates after testing for parallel trends. Amer. Econom. Rev. Insights 4(3):305–322.
Sandeen SK (2010) The evolution of trade secret law and why courts commit error when they do not follow the Uniform Trade Secrets Act. Hamline Law Rev. 33:493–543.
Somaya D (2012) Patent strategy and management: An integrative review and research agenda. J. Management 38(4):1084–1114.
Steinmeyer PA, Freeman S (2016) In today’s environment, what is ‘adequate consideration’ for a restrictive covenant signed by an existing employee? Epstein Becker Green Blogs (May 10), https://www.tradesecretsandemployeemobility.com/in-todays-environ ment-what-is-adequate-consideration-for-a-restrictive-covenantsigned-by-an-existing-employee.
Teece DJ (1986) Profiting from technological innovation: Implications for integration, collaboration, licensing and public policy. Res. Policy 15(6):285–305.
Tong TW, Reuer JJ, Peng MW (2008) International joint ventures and the value of growth options. Acad. Management J. 51(5): 1014–1029.
Wadhwa A, Bodas Freitas IM, Sarkar MB (2017) The paradox of openness and value protection strategies: Effect of extramural R&D on innovative performance. Organ. Sci. 28(5):873–893.
Wang R (2020) Judicial reward allocation for asymmetric secrets. Pace Law Rev. 40(2):226–287.
Wang Y (2023) Trade secrets laws and technology spillovers. Res. Policy 52(7):104794.
Winter SG (1987) Knowledge and competence as strategic assets. Teece DJ, ed. The Competitive Challenge: Strategies for Industrial Innovation and Renewal (Ballinger, Cambridge, MA), 159–184.
Wooldridge JM (2007) Econometric Analysis of Cross Section and Panel Data, 2nd ed. (MIT Press, Cambridge, MA).
Younge KA, Tong TW, Fleming L (2015) How anticipated employee mobility affects acquisition likelihood: Evidence from a natural experiment. Strategic Management J. 36(5):686–708.
Zaheer S, Schomaker M, Genc M (2003) Identity vs. culture in mergers of equals. Eur. Management J. 21(2):185–191.