Does legal protection of trade secrets reduce the cost of debt? Evidence from the inevitable disclosure doctrine

Abstract We examine the effect of the inevitable disclosure doctrine (IDD) on cost of debt. Our difference‐in‐differences analyses reveal that the IDD significantly reduces the loan spread for borrowers in adopting states. To elucidate the mechanisms of such finding, we find that the IDD's effect is weaker in industries with high management turnover but stronger for long‐term loans. Moreover, cross‐sectional tests reveal that the effect is weaker for firms facing high industry competition, internal control weakness, and information asymmetry. IDD also mitigates loan covenant tightness. These findings elucidate the implications of IDD on corporate borrowing costs.