The Impact of Labor Mobility Restrictions on Managerial Actions: Evidence from the Mutual Fund Industry

Abstract

We examine how labor mobility restrictions in the form of non-compete clauses in employment contracts affect employee behavior. Using the mutual fund industry as testing laboratory, we show that fund managers respond to higher job termination costs due to increased enforceability of non-compete clauses by increasing their contribution to their employer’s profitability. They do so by improving their fund performance, while also increasing window dressing to attract new customers and increase fee revenues. Furthermore, the change in incentives disciplines managers’ risk taking, as shown by noticeable reductions in their portfolio risk, portfolio deviations from peers, and engagement in fund tournaments.

Keywords: labor mobility, non-compete clauses, mutual funds, career concerns

JEL Classification: D86, G23 K12, K31, M5