Screening Spinouts? How Noncompete Enforceability Affects the Creation, Growth, and Survival of New Firms

48 Pages Posted: 13 Nov 2014 Last revised: 20 Jul 2016

See all articles by Evan Starr

Evan Starr

University of Maryland Robert H Smith School of Business

Natarajan Balasubramanian

Syracuse University - Whitman School of Management

Mariko Sakakibara

University of California, Los Angeles (UCLA) - Policy Area

Date Written: July 1, 2016

Abstract

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

Starr, Evan and Balasubramanian, Natarajan and Sakakibara, Mariko, Screening Spinouts? How Noncompete Enforceability Affects the Creation, Growth, and Survival of New Firms (July 1, 2016). Management Science, Forthcoming, US Census Bureau Center for Economic Studies Paper No. CES-WP- 14-27, Available at SSRN: https://ssrn.com/abstract=2523418 or http://dx.doi.org/10.2139/ssrn.2523418

Evan Starr (Contact Author)

University of Maryland Robert H Smith School of Business ( email )

United States
(301) 405-2320 (Phone)

Natarajan Balasubramanian

Syracuse University - Whitman School of Management ( email )

United States

Mariko Sakakibara

University of California, Los Angeles (UCLA) - Policy Area ( email )

110 Westwood Plaza
Los Angeles, CA 90095
United States
310-825-7831 (Phone)
310-206-3337 (Fax)

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