Human Capital Driven Acquisition: Evidence from the Inevitable Disclosure Doctrine

57 Pages Posted: 11 Jan 2016 Last revised: 26 Jan 2020

See all articles by Deqiu Chen

Deqiu Chen

University of International Business and Economics

Huasheng Gao

Fanhai International School of Finance, Fudan University

Yujing Ma

Hong Kong Polytechnic University

Date Written: January 24, 2020

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

JEL Classification: G34, J24, J62, M51, M54

Suggested Citation

Chen, Deqiu and Gao, Huasheng and Ma, Yujing, Human Capital Driven Acquisition: Evidence from the Inevitable Disclosure Doctrine (January 24, 2020). Available at SSRN: https://ssrn.com/abstract=2713600 or http://dx.doi.org/10.2139/ssrn.2713600

Deqiu Chen

University of International Business and Economics ( email )

Beijing
China

Huasheng Gao

Fanhai International School of Finance, Fudan University ( email )

Beijing West District Baiyun Load 10th
Shanghai, 100045
China
2165642222 (Phone)
2165642222 (Fax)

Yujing Ma (Contact Author)

Hong Kong Polytechnic University ( email )

Hung Hom
Kowloon
Hong Kong

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