Labor Market Immobility and Incentive Contract Design

55 Pages Posted: 30 Nov 2018 Last revised: 27 Oct 2020

See all articles by Chen Lin

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Lai Wei

Lingnan University - Department of Finance and Insurance

Nan Yang

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: November 20, 2018

Abstract

Research suggests that restricted labor mobility discourages managers from investing in human capital and reduces firm value. However, whether firms re-incentivize managers to mitigate its adverse effects remains unexplored. We find that after the adoption of the inevitable disclosure doctrine (an exogenous negative shock to managers’ mobility), firms convexify equity incentives and lengthen the exercisability of new option grants, especially for managers facing greater ex-ante mobility. Furthermore, treated firms become more likely to reprice options following bad luck. We provide causal evidence that labor mobility restrictions affect executive incentive compensation design and that firms react in an optimal contracting manner.

Keywords: Labor market mobility, Incentive compensation, Optimal contracting, Human capital investment, Trade secrets, Non-patentable innovation

JEL Classification: G30, G34, J33, M52, M54

Suggested Citation

Lin, Chen and Wei, Lai and Yang, Nan, Labor Market Immobility and Incentive Contract Design (November 20, 2018). Available at SSRN: https://ssrn.com/abstract=3289225 or http://dx.doi.org/10.2139/ssrn.3289225

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Lai Wei (Contact Author)

Lingnan University - Department of Finance and Insurance ( email )

8 Castle Peak Road
Lingnan University
Hong Kong, New Territories
China

Nan Yang

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

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