Screening Spinouts? How Noncompete Enforceability Affects the Creation, Growth, and Survival of New Firms
Management Science, Forthcoming
48 Pages Posted: 13 Nov 2014 Last revised: 20 Jul 2016
Date Written: July 1, 2016
This paper examines how the enforceability of noncompete covenants affects the creation, growth, and survival of spinouts and other new entrants. The impact of noncompete enforceability on new firms is ambiguous, since noncompetes reduce knowledge leakage but impose hiring costs. However, we posit that enforceability screens formation of within-industry spinouts (WSOs) relative to non-WSOs by dissuading founders with lower human capital. Using data on 5.5 million new firms, we find greater enforceability is associated with fewer WSOs, but relative to non-WSOs, WSOs that are created tend to start and stay larger, are founded by higher-earners, and are more likely to survive their initial years. In contrast, we find no impact on non-WSO entry, and a negative effect on size and short-term survival.
Keywords: Covenants Not to Compete, Entrepreneurship, Spinouts
JEL Classification: L25, L26, L41, L5, K2, K3, J6, M2, M5
Suggested Citation: Suggested Citation