Screening Spinouts? How Noncompete Enforceability Affects the Creation, Growth, and Survival of New Firms

Evan Starr (), Natarajan Balasubramanian () and Natarajan Balasubramanian ()
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Evan Starr: Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742
Natarajan Balasubramanian: Whitman School of Management, Syracuse University, Syracuse, New York 13244
Natarajan Balasubramanian: Anderson School of Management, University of California, Los Angeles
Authors registered in the RePEc Author Service: Natarajan Balasubramanian

Management Science, 2018, vol. 64, issue 2, 552-572

Abstract: This paper examines how the enforceability of noncompete covenants affects the creation, growth, and survival of spinouts and other new entrants. The impact of noncompete enforceability on new firms is ambiguous, since noncompetes reduce knowledge leakage but impose hiring costs. However, we posit that enforceability screens formation of within-industry spinouts (WSOs) relative to non-WSOs by dissuading founders with lower human capital. Using data on 5.5 million new firms, we find greater enforceability is associated with fewer WSOs, but relative to non-WSOs, WSOs that are created tend to start and stay larger, are founded by higher-earners, and are more likely to survive their initial years. In contrast, we find no impact on non-WSO entry and a negative effect on size and short-term survival. The online appendix is available at https://doi.org/10.1287/mnsc.2016.2614 . This paper was accepted by David Hsu, entrepreneurship and innovation.

Keywords: spinouts; start-ups; firm performance; market entry; noncompete agreements (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (21)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:64:y:2018:i:2:p:552-572

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