Enforceability Of Non-compete Agreements Research Articles

Innovation and the Enforceability of Noncompete Agreements

Innovation and the Enforceability of Noncompete Agreements

The enforceability of non-compete agreements and different types of entrepreneurship: evidence from Utah and Massachusetts

PurposeThe purpose of this paper is to expand the empirical literature on the association between non-compete agreement (NCA) enforceability and entrepreneurship by investigating how NCA policies affect different types of entrepreneurship with incorporated and unincorporated businesses.Design/methodology/approachThe authors estimate difference-in-differences regressions based on individual-level data. This allows to control for heterogeneity at the individual level. Additionally, the authors provide graphical evidence using the synthetic control method (SCM).FindingsThe authors' findings show that the decrease in the enforceability of NCAs in Massachusetts resulted in a higher rate of unincorporated entrepreneurship among low-wage workers. At the same time, there was no sizable effect on the rate of incorporated entrepreneurship. For Utah, the authors' results indicate that the reform increased both types of entrepreneurship. The findings imply that states can promote entrepreneurial activity by reducing the enforceability of NCAs. The way of changing the enforceability of NCAs matters, as different provisions encourage different types of entrepreneurship in a given state.Originality/valueThe authors contribute to the literature on NCA enforceability effects on entrepreneurship in three ways. First, the authors utilize two quasi-experiments, the NCA policy changes in Utah in 2016 and Massachusetts in 2018, limiting NCAs to one year for all workers. Second, to the authors' knowledge, this is the first individual-level analysis that separates self-employment with incorporated and unincorporated businesses as two different types of entrepreneurship to analyze potentially heterogeneous effects of NCAs. Third, this is the first study to utilize American Community Survey (ACS) data in this literature.

Does Managerial Human Capital Shape Investment Strategy?

We build a model investigating how managerial human capital affects a firm's optimal choice of external investment vs. internal investment strategy. At the heart of the model is the idea that managers with more general skills have better outside opportunities and hence can command greater compensation from their employer. We show that this greater compensation will optimally take the form of stronger incentives, which in turn lead to higher managerial effort. In this case, it becomes optimal for the firm to engage in activities in which managerial effort is most valuable. To the extent that the success of external investment through acquisitions is more directly dependant on managerial effort than internal investment which is relatively more dependent other internal factors; then we should observe a positive effect of genera skills on firms' tendency to adopt external investment strategy. Moreover, this relationship should be more pronounced the greater the agency concerns and associated strength of incentives. Empirical analysis using U.S. data provides consistent support for the above model predictions. To address endogeneity concerns, we use variation in enforceability of non-compete agreements as an instrument for general managerial skills. The IV regressions suggests a causal and positive impact of general skills on external investment strategy.

The Enforceability of Non-Compete Agreements and Different Types of Entrepreneurship: Evidence from Utah and Massachusetts

The Enforceability of Non-Compete Agreements and Different Types of Entrepreneurship: Evidence from Utah and Massachusetts

Employment mobility and pay for sector performance

We argue that executives' employment mobility significantly affects their pay for sector performance. In particular, as executives' outside employment options increase with social connections we hypothesize that better-connected executives receive greater pay for sector performance. Supportive of our hypothesis, we find that pay for sector performance is more pronounced when executives are better connected, both within and across industries. Further, intra-industry connections have a stronger effect when enforceability of non-compete agreements is weaker. While the prior literature finds that social networks impact the level of CEO pay through an information channel, our findings suggest that social networks also impact pay for sector performance through an outside employment options channel.

Low-Wage Workers and the Enforceability of Noncompete Agreements

We exploit the 2008 Oregon ban on noncompete agreements (NCAs) for hourly-paid workers to provide the first evidence on the impact of NCAs on low-wage workers. We find that banning NCAs for hourly workers increased hourly wages by 2%–3% on average. Since only a subset of workers sign NCAs, scaling this estimate by the prevalence of NCA use in the hourly-paid population suggests that the effect on employees actually bound by NCAs may be as great as 14%–21%, though the true effect is likely lower due to labor market spillovers onto those not bound by NCAs. Whereas the positive wage effects are found across the age, education, and wage distributions, they are stronger for female workers and in occupations where NCAs are more common. The Oregon low-wage NCA ban also improved average occupational status in Oregon, raised job-to-job mobility, and increased the proportion of salaried workers without affecting hours worked.This paper was accepted by Lamar Pierce, organizations.

Physician Practice Organization and Negotiated Prices: Evidence from State Law Changes

We study the relationship between physician organizational structures and prices negotiated with private insurers. Using variation caused by state-level judicial law changes, we show that a 10 percent increase in the enforceability of noncompete agreements (NCAs) causes 4.3 percent higher physician prices, and declines in practice sizes and concentration. Using two databases containing every physician establishment and firm between 1996 and 2007, linked to negotiated prices, we show that larger practices have lower prices for services with high fixed costs, consistent with economies of scale. In contrast, increases in firm concentration conditional on establishment concentration leads to higher prices. (JEL D24, G22, I11, J44, K22, L13)

Does the executive labor market discipline? Labor market incentives and earnings management

This paper investigates the role of outside options in the executive labor market on earnings management decisions. To proxy for executives’ outside options, we use the number of times other firms cite the executive’s firm as a compensation peer. We find that executives with more citations conduct less earnings management. Exploiting the 2006 SEC requirement for compensation peer disclosure as a quasi-natural shock to executives’ awareness of outside options, we show that the executives who should be more responsive to outside options significantly reduce earnings management. Cross-sectional tests support a labor market discipline channel of outside options. Finally, we exploit state-level recognition of Inevitable Disclosure Doctrine and enforcement of non-compete agreements as cross-sectional restrictions on labor mobility and show that the impact of peer citations on reducing earnings management is stronger when there are fewer restrictions on mobility.

Low-Wage Workers and the Enforceability of Non-Compete Agreements

We exploit the 2008 Oregon ban on non-compete agreements (NCAs) for hourly-paid workers to provide the first evidence on the impact of NCAs on low-wage workers. We find that banning NCAs for hourly...

Labor mobility and the cost of debt

This paper empirically shows that the cost of debt financing is systematically higher for firms that operate in mobile labor markets. We posit two channels through which labor mobility could affect firms’ cost of debt: 1. higher default risk, due to an increase in cash flow volatility arising from the potential loss of valuable human capital assets, and 2. less pledgeable assets, given that a firm has limited control and ownership over the firm’s human capital. Using across U.S. state variations in the enforceability of non-compete agreements that restrict employee job switches as a proxy for anticipated labor mobility, and state-level reforms to non-compete laws to capture exogenous shocks to labor mobility, we find that labor mobility has a significantly positive relation with the credit spreads of U.S. corporate debt issued from 1990–2014. Moreover, our analysis reveals that the effect of labor mobility is greater for firms that are more reliant on human capital – i.e., high R&D firms and firms with greater organizational capital – which corroborates the main results. Overall, these findings suggest that investors price financial contracts by taking into account the risk that arises from labor mobility.

Labor Mobility and Capital Misallocation in the Mutual Fund Industry

If capital won’t come to fund managers, fund managers will go to capital. I document that fund managers move across mutual fund firms to manage amounts of capital that better match their skill, which improves the allocative efficiency of capital across fund managers. For causal identification, I exploit exogenous shocks to fund managers’ ability to switch firms due to state-level changes to non-compete laws. In states that strengthen the enforceability of non-compete agreements, the propensity of fund managers to switch mutual fund firms is halved, capital misallocation across managers increases by about 10%, and the sum of monthly value added of managers declines by over $25 million. These results indicate that fund managers’ mobility across firms plays an important role in the efficient allocation of capital within the mutual fund industry.

Low-Wage Workers and the Enforceability of Non-Compete Agreements

We exploit the 2008 Oregon ban on non-compete agreements (NCAs) for hourly-paid workers to provide the first evidence on the impact of NCAs on low-wage workers. We find that banning NCAs for hourly workers increased hourly wages by 2-3% on average. Since only a subset of workers sign NCAs, scaling this estimate by the prevalence of NCA use in the hourly-paid population suggests that the effect on employees actually bound by NCAs may be as great as 14-21%, though the true effect is likely lower due to labor market spillovers onto those not bound by NCAs. While the positive wage effects are found across the age, education and wage distributions, they are stronger for female workers and in occupations where NCAs are more common. The Oregon low-wage NCA ban also improved average occupational status in Oregon, raised job-to-job mobility, and increased the proportion of salaried workers without affecting hours worked.

Non-Compete Agreements, Outside Employment Opportunities, and Insider Trading Profits

Companies often use non-compete agreements to restrict employees from joining or forming a rival company. However, enforcement of non-compete agreements could also affect executive and director incentives to trade on their inside ownership because excessive trading profits could result in termination, which would trigger the restrictions imposed by the non-compete agreements. We find that executives’ and directors’ insider trading profits are lower for companies headquartered in states with greater enforcement of non-compete agreements. This result is stronger for companies with greater product market competition and insiders with more trading. We also find associations between the enforcement of non-compete agreements and lower insider trading volume and lower future earnings surprises. Together, these findings suggest that enforcement of non-compete agreements reduce the trading incentives for executives and directors by imposing costs associated with executives’ and directors’ future outside employment opportunities.

Do General Managerial Skills Spur Innovation?

We show that firms with chief executive officers (CEOs) who gain general managerial skills over their lifetime of work experience produce more patents. We address the potential endogenous CEO–firm matching bias using firm–CEO fixed effects and variation in the enforceability of noncompete agreements across states and over time during the CEO’s career. Our findings suggest that generalist CEOs spur innovation because they acquire knowledge beyond the firm’s current technological domain, and they have skills that can be applied elsewhere should innovation projects fail. We conclude that an efficient labor market for executives can promote innovation by providing a mechanism of tolerance for failure. The Internet appendix is available at https://doi.org/10.1287/mnsc.2017.2828 . This paper was accepted by Gustavo Manso, finance.

Employee Mobility, Noncompete Agreements, Product-Market Competition, and Company Disclosure

This study explores the impact on companies’ disclosures of U.S. states’ different propensities to enforce noncompete agreements. I find a negative association between a state’s enforcement of noncompete agreements and disclosure activities of firms headquartered in that state. Companies that face local rivals drive some results. Analyses that focus on several state-level changes in enforcement level of noncompete agreements confirm this association. Overall, the findings are consistent with a higher enforcement of noncompete agreements increasing proprietary costs of disclosure, because companies in high-enforcement settings are less informed about each other due to reduced information leakage from employee transfers across competitors. The results suggest that the overall environment for information spillovers surrounding a firm impacts its degree of disclosure to the capital markets and that state-specific enforcement of noncompete agreements can be used as a novel measure of the proprietary costs of disclosure.

Do General Managerial Skills Spur Innovation?

We show that firms with chief executive officers (CEOs) who gain general managerial skills over their lifetime work experience produce more patents. We address the potential endogenous CEO-firm matching bias using firm-CEO fixed-effects and variation in the enforceability of non-compete agreements across states and over time during the CEO’s career. Our findings suggest that generalist CEOs spur innovation because they have skills that can be applied elsewhere should innovation projects fail. We conclude that an efficient labor market for executives can promote corporate innovation by providing a mechanism of tolerance for failure.

Contingent Loyalty and Restricted Exit: Commentary on the Restatement of Employment Law

Chapter 8 of the American Law Institute’s Restatement of Employment Law proposes bad law in every sense of the word when it restricts job mobility of current and former employees by imposing a general duty of loyalty and providing for enforcement of non-compete agreements. Its rules are vague and confusing on crucial issues where clarity and precision are needed. In allowing employers to prevent current and former employees from engaging in competitive employment, Chapter 8 is out of sync with the assumptions underlying the at will rule articulated in Chapter 2 of the Restatement, which insists that employment is an at will relationship that either side can terminate in order to pursue more lucrative opportunities with other contracting partners. It is also out of sync with the norms of many contemporary employment relationships in which employees are expected to bring their knowledge and skills to every job and to depart, perhaps after a relatively short-term period of employment, with enhanced knowledge and skills. The only legitimate interests employers have in restraining competition by current or former employees are protected by the law of misappropriation of trade secrets, by the torts of interference with contract and interference with prospective business advantage, and by the corporate opportunity doctrine for managerial employees who owe a fiduciary duty to the firm. The duty of loyalty, as stated in the Restatement and as applied by courts, adds no legitimate protection to employers and is simply anticompetitive. More important, in allowing employers to resort to contract and tort liability to restrict labor market mobility, the Restatement ignores a substantial body of empirical research showing that legal restrictions on mobility are bad for employees, bad for firms, and bad for the economy as a whole. Courts should approach provisions of Chapter 8 skeptically. If they do, the Restatement may fail in its aspirations to shape the law, but at least it will not fail in the ALI’s goal of improving the law.

The Enforceability of Non-Compete Agreements Against Sports Agents in the United States : For a Discussion of Professional Athlete's Right to Freely Choose Their Representation

The Enforceability of Non-Compete Agreements Against Sports Agents in the United States : For a Discussion of Professional Athlete's Right to Freely Choose Their Representation

A Logit Model to Predict the Enforceability of Noncompete Agreements

A random sample of 104 from 411 litigated cases was analyzed to discern whether certain case characteristics can predict case outcomes of noncompete agreements signed by employees. Significant univariate analyses enabled the construction of a logit model to predict such outcomes. Suggestions for employment practices from the employer's perspective are also presented.

Human Capital and Covenants Not to Compete

Human Capital and Covenants Not to Compete