Abstract
We report that when states adopt a doctrine that reduces the risk that employees transfer to rival firms, affected firms respond by cutting option grants to both executives and rank-and-file (R&F) employees, especially if the firms have high R&D and nearby rivals. The reverse occurs if the states later reject the same doctrine. Our results suggest that firms actively use options to retain employees who are at risk of transferring proprietary intellectual capital to rival firms. The results further suggest that the firms’ decision-makers view the labor markets for both executives and R&F employees to be geographically segmented.
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