This paper investigates the impact of the passage of the inevitable disclosure doctrine (IDD) on bank lending behavior. Inevitable disclosure doctrine as parts of trade secret law gives the right of former employer to sue former employee when facing potential trade secret leakage by the employee. As evidence that banks are sensitive to the protection of its trade secret, using the passage of IDD as a proxy for deeper degree of trade secret protection, we find that banks offer more privilege loan terms to firms after the passage of the IDD. It suggests that banks share part of the value surplus from better trade secret protection with their customers. Specifically, banks offer lower interest rates, longer maturity, and larger loans to borrowers after the passage of the IDD. We also find that...[ Read more ]

This paper investigates the impact of the passage of the inevitable disclosure doctrine (IDD) on bank lending behavior. Inevitable disclosure doctrine as parts of trade secret law gives the right of former employer to sue former employee when facing potential trade secret leakage by the employee. As evidence that banks are sensitive to the protection of its trade secret, using the passage of IDD as a proxy for deeper degree of trade secret protection, we find that banks offer more privilege loan terms to firms after the passage of the IDD. It suggests that banks share part of the value surplus from better trade secret protection with their customers. Specifically, banks offer lower interest rates, longer maturity, and larger loans to borrowers after the passage of the IDD. We also find that the lead bank in a loan is more likely to form syndication after the passage of the law. After analyzing the contracts strictness of the loans, we find that loan contracts strictness is relaxed after the passage of the law. However, the effects of the IDD are mixed. The logit model shows that banks have a larger possibility to require collaterals in a loan contract. We conclude that the protection of trade secret as part of bank’s soft information matters to bank lending.

Keywords: Bank loan; Trade secret protection; Soft information