Non-Competes, Career Concerns, and Debt Covenants

57 Pages Posted: 18 Oct 2017

See all articles by Yun Lou

Yun Lou

Singapore Management University - School of Accountancy

Rencheng Wang

Singapore Management University - School of Accountancy

Yi Zhou

Fudan University

Date Written: July 2017

Abstract

We study the impact of managers’ career concerns from non-competes enforcement on the design of debt covenants in private debt agreements. Using exogenous changes in the enforceability of managers’ non-compete clauses over the period of 1992-2004 across states in the United States, we show that borrowers headquartered in U.S. states with strong enforcement of non-compete clauses have fewer debt covenants compared to those headquartered in states with weak enforcement after controlling for reporting quality, risk taking, and firm performance. Our evidence is consistent with the argument that reduced job mobility and enhanced career concerns incentivize managers to ex ante avoid debt covenants that may trigger default and lead to high risk of terminating their current employment. Moreover, the effect of the enforceability of noncompetes on debt covenants is more pronounced for managers with limited outside options (i.e., low ability, small network) or firms with strong bargaining power with lenders.

Keywords: Non-Compete Clauses, Career Concerns, Debt Covenants

JEL Classification: G21, G31, J41

Suggested Citation

Lou, Yun and Wang, Rencheng and Zhou, Yi, Non-Competes, Career Concerns, and Debt Covenants (July 2017). Available at SSRN: https://ssrn.com/abstract=3054876 or http://dx.doi.org/10.2139/ssrn.3054876

Yun Lou (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Rencheng Wang

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Yi Zhou

Fudan University ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

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