Firm Performance After California’s Refusal to Enforce Out-of-State Employee Non-Compete Agreements

Abstract

We empirically exploit a quasi-natural experiment of the California Supreme Court’s decision to stop enforcing out-of-state employee non- compete agreements. Applying resource-based theory, we conceptualize this legal change as allowing unique access to a strategic factor market for human capital (i.e., out of state employees subject to non-compete agreements). This access results in California firms experiencing a mean cumulative abnormal returns of 2.53% in the three days immediately following the court decision. Moreover, this increase is strongly influenced by both labor market and firm-level factors. Specifically, firms currently facing high in-state labor market competition particularly benefit from this newly available labor pool. Firms already employing large numbers of knowledge workers and those with high research and development intensity also experience increased stock market returns.