The Effect of Top-Employee Migration and Spin-Offs on Incumbent Firms

Abstract

Spin-offs are know to be superior performers compared to other de novo entrants. Spin-offs are thus expected to accrue greater and more long-term welfare effects than other start-ups, but if spin-offs are founded on the intellectual capital accumulated at their parent firms, they may be potentially harmful to those firms. However, similar effects on the performance of parent firms might be expected for top-employee migration to rival incumbent firms, or even for top employees who migrate to non-competitive destinations. Using the comprehensive Danish linked employer-employee database, we investigated how top-employee migration to spin-off, rival incumbent firms, and non-competitive destinations affect parent firms' hazard of exit, sales growth and employment growth. We found negative performance effects from top-employee migration independent of where employees migrate. Although departures of top employees to spin-offs were found to have negative effects on parent-firm performance, and this negative effect is greater than for the non-competitive departures, the effect is not significantly different from that of top employees who move to competing incumbent firms. We studied this phenomenon using different methods, including matched models adjusting for parent-firm heterogeneity.