We examine the effect of the increased protection of banks’ proprietary information on the surplus-sharing between banks and clients. Our identification strategy relies on the passage of the inevitable disclosure doctrine (IDD), which prevents a bank’s former employees from leaking proprietary information to rivals. We show that, after the passage of the IDD, banks offer loans with lower interest rates and longer time to maturity, and the loan interest rate is further lowered for bank-borrower pairs that have a prior lending relationship. Moreover, IDD adoptions result in a prolonged lending relationship. Further results show that banks whose trade secrets are protected by the IDD can sell loans at higher loan bidding prices and lower bid-ask spreads in the secondary loan market. Our findings suggest that the protection of proprietary information increases the value of establishing long-run lending relationships for banks; in response, banks share part of the surplus with their borrowers in the primary loan market.

Your participation is warmly welcomed!