Protection of Proprietary Information and Forced CEO Turnover: Evidence From a Quasi-natural Experiment
62 Pages Posted: 30 Oct 2018 Last revised: 6 Jul 2019
Date Written: October 8, 2018
We examine whether the protection of proprietary information affects forced CEO turnover decisions. Using changes in the state-level enforceability of the covenant not to compete (CNC) as exogenous shocks to the protection level of a firm’s proprietary information, we find that strengthening CNC enforceability increases the likelihood of forced CEO turnover and enhances the sensitivity of forced CEO turnover to firm performance. Such effects are more pronounced when firms face more severe product market threats and operate in industries with greater potential threats of predatory hiring. Further analyses suggest that the increase in CNC enforceability reduces the likelihood of non-forced CEO turnover and implies a reduction in external CEO supply. As a result, a firm’s forced CEO turnover decision more likely responds to changes in CNC enforceability when an internal successor is available. We also find that investors respond to forced CEO turnover decisions more positively when CNC enforceability increases.
Keywords: Proprietary information; Legal enforceability of covenants not to compete; Forced CEO turnover
JEL Classification: D23, G30, J63, K12, L20, O32
Suggested Citation: Suggested Citation