Protecting knowledge: How legal requirements to reveal information affect the importance of secrecy

Most firms use secrecy to protect their knowledge from potential imitators. However, the theoretical foundations for secrecy have not been well explored. We extend knowledge protection literature and propose theoretical mechanisms explaining how information visibility influences the importance of secrecy as a knowledge protection instrument. Building on mechanisms from information economics and signaling theory, we postulate that secrecy is more important for protecting knowledge for firms that have legal requirements to reveal information to shareholders. Furthermore, we argue that this effect is contingent on the location in a technological cluster, on a firm’s investment in fixed assets and on a firm’s past innovation performance. We test our hypotheses using a representative sample of 683 firms in Germany between 2005 and 2013. Our results support the moderation effect of a technological cluster and a firm’s investment in fixed assets. Our findings inform both academics and managers on how firms balance information disclosure requirements with the use of secrecy as a knowledge protection instrument.