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Enforceability of Noncompetition Agreements and Forced Turnovers of Chief Executive Officers

Yupeng Lin, Florian Peters and Hojun Seo

Journal of Law and Economics, 2022, vol. 65, issue 1, 177 - 209

Abstract: We examine whether corporate boards factor the potential cost of competitive harm caused by a departing chief executive officer (CEO) into their forced-turnover decisions. Using staggered changes in the state-level enforceability of a covenant not to compete (CNC) for identification, we find that enhanced enforceability of CNCs increases both the likelihood of forced CEO turnover and the sensitivity of forced CEO turnover to firm performance. We present additional cross-sectional evidence that shows that such effects are more pronounced when firms face more severe product market threats or operate in industries with greater potential threats of predatory hiring. Investors react to turnover announcements more positively when enforceability increases, which indicates that enhanced enforceability of CNCs increases efficiency in decisions to replace CEOs.

Date: 2022
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