Reserve to Preserve: Exploring the Impact of Trade Secrets on Corporate Cash Reserves

ABSTRACT This study examines the impact of trade secrecy on corporate cash holdings using a panel dataset of U.S. firms spanning the period from 1996 to 2021. Consistent with the proprietary cost hypothesis, we find that firms with trade secrets hold higher levels of cash reserves. Furthermore, we document that the effect is more pronounced among younger firms and those operating in competitive industries, as well as in high‐tech and healthcare sectors. However, stronger legal protections, such as the Uniform Trade Secrets Act, appear to mitigate such impact. In an additional test, we show that firms with trade secrets have a higher marginal value of cash than firms without trade secrets. Overall, our findings highlight the strategic role of trade secrecy in shaping liquidity management, particularly in safeguarding undisclosed innovations across diverse competitive and legal environments.