Intellectual Property professionals, and owners of intellectual property (IP) rights, generally agree on the important value of patents. A relevant question to consider is whether an innovation would be more properly protected by a trade secret, or by a patent application.

There are numerous factors to consider in making a decision, and all these considerations go beyond this post. However, it is noted that a major difference between the patent system and trade secrets is that patents require the disclosure of innovation whereas trade secrets require the opposite.

An interesting angle is proposed by Nishant Dass, Vikram Nanda and Steven Chong Xiao, who are professors of finance, in the article Intellectual Property Protection and Financial Markets: Patenting vs. Secrecy1.

The authors made the hypothesis that greater trade secret protection encourages companies to adopt this approach. The consequences will be an increased information asymmetry and reduced stock liquidity. On the other hand, better patent protection encourages companies to apply for patents, therefore disclosing more information, which results in higher stock liquidity.

The authors conducted a retrospective study of the stock market’s reaction following the implementation of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) compared to the enactment of trade secret statutes in the United States of America.

Conclusions:

The implementation of TRIPS, which strengthened patent protection, increased transparency and stock liquidity of patenting companies. Disclosure of inventions by publication of patent applications offer investors direct information concerning the rights held by the company. A patent system favorable to Applicants encourages companies to obtain patents, which plays an important role in the financing of small innovating companies.

The enactment of trade secret statutes reduced the publicly available information about the companies and caused a reduction in stock liquidity. The strengthening of trade secret protection also had the effect of worsening the market's reaction to announcement of seasoned equity offerings (or second equity offerings - SEO).

The conclusions can be useful to legislators and policy-makers in developing suitable laws and policies to facilitate the growth of innovative companies.

A link to the article Intellectual Property Protection and Financial Markets: Patenting vs. Secrecy may be found here: http://ssrn.com/abstract=2517838 or http://dx.doi.org/10.2139/ssrn.2517838.