Square Peg in a Round Hole: Comparability and Trade Secrets

In this paper, I document the impact of knowledge assets on between firms accounting quality. Specifically, I study if financial statement comparability (comparability) is affected by the protection provided to trade secrets–a key knowledge asset. To do this, I utilize the enactment of the uniform trade secrets act (UTSA) in the U.S. states in a staggered manner, as a quasi-natural experiment to the enhanced protection levels provided to trade secrets. I find that as protection to trade secrets increase, comparability reduces. The results are weaker for firms that have more intangibles intensity and that have a higher proportion of
sophisticated users of financial statements. Overall, this paper establishes trade secrets as a determinant of comparability.