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Trade secret laws and initial public offering underpricing

Author

Listed:
  • Chu-hsuan Chang

    (National Taipei University of Business)

  • Woan-lih Liang

    (National Yang Ming Chiao Tung University
    National Taiwan University)

  • Yanzhi Wang

    (National Taiwan University
    National Taiwan University)

Abstract

This paper examines the impact of trade secret laws on the underpricing of initial public offerings (IPOs) in the United States, where we focus on the Uniform Trade Secret Act and/or the inevitable disclosure doctrine. Given that trade secret laws help firms protect their know-how in the form of trade secrets, we propose that trade secrets protected by these laws may result in increased corporate opacity, leading to greater IPO underpricing. Empirically, the average first-day returns of IPOs in states with trade secret laws are 12.7% higher than those in states without such laws. Using the information disclosed in the 10-K report on whether the firm owns trade secrets, we suggest that the existence of trade secret laws enhances the protection effect of firm maintenance of trade secrets, which leads to greater IPO underpricing. Further analyses show that the effect of trade secret laws is reinforced for IPO firms operating in complex industries, IPO firms with R&D investments, and large IPO firms, suggesting that trade secret laws increase the difficulties investors face in assessing the intrinsic value of such firms.

Suggested Citation

  • Chu-hsuan Chang & Woan-lih Liang & Yanzhi Wang, 2024. "Trade secret laws and initial public offering underpricing," Review of Quantitative Finance and Accounting, Springer, vol. 63(1), pages 325-353, July.
    • Handle: RePEc:kap:rqfnac:v:63:y:2024:i:1:d:10.1007_s11156-024-01259-3
    DOI: 10.1007/s11156-024-01259-3
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    References listed on IDEAS

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    More about this item

    Keywords

    Trade secret laws; UTSA; IDD; IPO; Underpricing;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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