Human Capital-Driven Acquisition: Evidence from the Inevitable Disclosure Doctrine

Deqiu Chen (), Huasheng Gao and Yujing Ma ()
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Deqiu Chen: Business School, University of International Business and Economics, Beijing 100029, China
Yujing Ma: School of Accounting and Finance, Hong Kong Polytechnic University, Hung Hom, Hong Kong

Management Science, 2021, vol. 67, issue 8, 4643-4664

Abstract: We present evidence that the desire to gain human capital is an important motive for corporate acquisitions. Our tests exploit the staggered recognition of the Inevitable Disclosure Doctrine (IDD) by U.S. state courts, which prevents employees with trade secret knowledge from working for other firms. We find a significant increase in the likelihood of being acquired for firms headquartered in states that recognize such a doctrine relative to firms headquartered in states that do not. Our result is stronger for firms with greater human capital and for firms whose employees have better ex ante employment mobility. We show that the IDD is positively associated with the retention of target firms’ key technicians, employees, and top executives after an acquisition. We also show that the IDD is positively associated with synergy creation, acquirers’ announcement returns, and acquirers’ long-run stock and operating performance. Overall, our result indicates that corporate acquisitions can be used as a means for firms to overcome labor market frictions and gain access to valuable human capital.

Keywords: acquisition; human capital; labor market friction; inevitable disclosure doctrine (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (10)

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