Non-Compete Agreements and Capital Structure Decisions

Bektemir Ysmailov
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Bektemir Ysmailov: Nazarbayev University, Graduate School of Business

No 2024/02, Working Papers from Nazarbayev University, Graduate School of Business

Abstract: This paper examines the impact of changes in the enforceability of non-compete agreements (NCAs) on capital structure decisions. Using a novel dataset of NCA enforceability reforms across U.S. states from 1992 to 2013, I employ a difference-in-differences methodology to establish that following an increase in the enforceability of NCAs, firms decrease their leverage. The findings are consistent with the managerial career concerns hypothesis: by restricting outside employment opportunities, heightened NCA enforceability increases managers' aversion to risk and financial distress, prompting more conservative capital structures. Cross-sectional evidence underscores the coexistence of both career concerns and proprietary information protection channels within the same empirical setting. This study provides robust evidence of how labor market frictions influence corporate financing policies, offering new insights into the interplay between managerial incentives and capital structure decisions.

Keywords: leverage; labor mobility; career concerns; agency conflicts; trade secrets (search for similar items in EconPapers)
JEL-codes: G32 G34 J24 J40 K31 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2024-05
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Persistent link: https://EconPapers.repec.org/RePEc:asx:nugsbw:2024-02

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