Highlights
- Noninnovative firms withhold more chemical information when there are no monitoring activities nearby, indicating the presence of strategic withholding behaviour.
- Strategic withholding of chemicals is more likely to be observed in states with loose disclosure rules, when regulators are budget-constrained, and in rural areas.
- Opportunistic withholding of chemical data was primarily observed among publicly traded operators, indicating that firm ownership structure influences the likelihood of strategic nondisclosure.
In this study, the researcher examined whether firms opportunistically use the exemption rule to hide environmental externalities when making trade secret claims. Mandatory environmental disclosure regulations are used as a policy tool to monitor the negative externalities associated with the goods and services provided by firms. These disclosures let the public better understand their environmental exposure and also provide easy access to information for regulators and scientists.
Despite these benefits, forcing firms to make full disclosure imposes private costs upon firms, with the associated proprietary cost a major concern. Regulators have responded to corporate concerns by letting firms apply discretion and label proprietary information as trade secrets.
In the study, hydraulic fracking (HF) in the United States was used as the research setting, investigating fracking operators’ trade secret claims in a mandatory chemical disclosure program.
In the study, hydraulic fracking (HF) in the United States was used as the research setting, investigating fracking operators’ trade secret claims in a mandatory chemical disclosure program. Fracking is a technique that involves the injection of large quantities of fracking fluids underground, creating cracks in the deep-rock formation to stimulate the flow of oil and gas.
Fractured wells now account for over 70% of the oil and gas wells drilled in the United States, where the composition of the fracking fluid significantly affects the productivity of well extraction. Formulas that increase the quantity of oil and gas that can be extracted are an innovation that an operator would want to protect.
By referring to a disclosure form, the public can evaluate the toxicity of fracking chemicals by reviewing the list of chemicals. Operators are required to disclose the concentration level of each fracking additive, and as a result, this disclosure can let competitors easily reverse-engineer fracking processes. To avoid giving up trade secrets, operators are allowed to selectively withhold the identity of key chemical ingredients, making it difficult for competitors to imitate the formula for the fluid. The identity of the withheld chemical is replaced with “proprietary” or other similar terms.
To date, companies have reported more than 450 million chemical entries under the disclosure program, with about 16% of these kept as trade secrets.
The study approach used two steps to classify: First, as operators are only allowed to withhold proprietary information, the group of operators who are more likely to have proprietary knowledge of chemical choices were identified, labelled as “innovative” operators. The group of operators who are less likely to have proprietary knowledge were labelled as “non-innovative” operators. Next, following the literature on firm incentives to withhold negative information, whether innovative and noninnovative operators strategically vary their information withholding levels as a function of the perceived probability of detection was also studied.
For innovative operators, however, whether opportunistic withholding could be empirically detected was not clear. Conceptually, innovative operators can have both proprietary-cost concerns and opportunistic incentives to withhold information. Nevertheless, whether opportunistic behaviour could be observed depended on the extent to which the undesirable chemicals formed their trade secrets. If most of the undesirable chemicals that innovative operators want to withhold are proprietary, the perceived probability of detection would not affect their nondisclosure decisions because withholding proprietary information is allowed by regulators.
Noninnovative operators near water monitoring stations withheld less chemical information in their fracking disclosures. There was no stronger and consistent evidence of strategic responses to different monitoring conditions by innovative operators. In addition, this opportunistic behaviour was only documented for publicly traded operators. Specifically, noninnovative public operators labelled 6.2% less chemical information as proprietary (approximately 37% of the average withholding rate) when presented with a water quality monitor than when they were unwatched. The primary incentive for operators to engage in opportunistic withholding is to reduce the cost of the societal backlash when disclosing polluting practices. Thus, these findings are consistent with public operators perceiving such costs as higher.
Noninnovative public operators tend to withhold more chemical information after being sued by local residents.
The main findings indicate that noninnovative public operators may opportunistically withhold chemical information and that external environmental monitoring can potentially act as a constraint. This main effect varied as a function of regulatory strength and the vested interests of local communities. The deterrent effect was stronger in states with more rigorous trade secret claim processes, suggesting that operators have stronger incentives to disclose rather than withhold information when they are monitored in states with more stringent disclosure rules. Second, consistent with budget constraints resulting in a lower level of monitoring capacity, there was a stronger deterrent effect when environmental regulators were less resource-constrained. There was also a stronger deterrent effect for wells located in urban areas, where the wells potentially have a greater societal impact and are subject to higher levels of scrutiny. Noninnovative public operators tend to withhold more chemical information after being sued by local residents. This result is sensitive to the intensity of external monitoring, perhaps because water quality testing results can be listed as evidence in the litigation process.
Findings indicate that noninnovative operators withhold significantly less information when they are close to environmental monitors. If noninnovative operators are truly withholding proprietary information, they should be less concerned about external monitoring and behave more consistently under different monitoring conditions. There was no strong evidence that innovative operators significantly varied their withholding levels under different monitoring conditions. Finally, the result of opportunistic withholding was only documented for publicly traded operators.
Keywords: mandatory environmental disclosure; reporting regulation; innovation; trade secret; avoidance strategy; misreporting; environmental monitoring; pollution; fracking
* Learn more from the full research article here:
http://dx.doi.org/10.1111/1475-679X.12583
