Enforceability of Noncompetition Agreements and Forced CEO Turnover

Journal of Law and Economics, forthcoming

46 Pages Posted: 30 Oct 2018 Last revised: 7 Jun 2021

See all articles by Yupeng Lin

Yupeng Lin

National University of Singapore

Florian S. Peters

University of Amsterdam

Hojun Seo

Purdue University

Date Written: June 5, 2021

Abstract

We examine whether corporate boards factor the potential cost of competitive harm caused by a departing CEO into the forced CEO turnover decision. Using staggered changes in the state-level enforceability of Covenants Not to Compete (CNC) for identification, we find that enhanced CNC enforceability 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 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 CNC enforceability increases, indicating that enhanced CNC enforceability increases efficiency in CEO replacement decisions.

Keywords: Legal enforceability of Covenant Not to Compete; Competitive harm; Forced CEO turnover.

JEL Classification: D23, G30, J63, K12, L20, O32

Suggested Citation

Lin, Yupeng and Peters, Florian S. and Seo, Hojun, Enforceability of Noncompetition Agreements and Forced CEO Turnover (June 5, 2021). Journal of Law and Economics, forthcoming, Available at SSRN: https://ssrn.com/abstract=3262366 or http://dx.doi.org/10.2139/ssrn.3262366

Yupeng Lin (Contact Author)

National University of Singapore ( email )

15 Kent ridge drive
Singapore
Singapore

HOME PAGE: http://sites.google.com/site/scottlinyupeng/

Florian S. Peters

University of Amsterdam ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TW
Netherlands

Hojun Seo

Purdue University ( email )

403 W State St
West Lafayette, IN 47907
United States

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