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

See all articles by Yupeng Lin

Yupeng Lin

National University of Singapore

Hojun Seo

National University of Singapore

Date Written: October 8, 2018

Abstract

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

Lin, Yupeng and Seo, Hojun, Protection of Proprietary Information and Forced CEO Turnover: Evidence From a Quasi-natural Experiment (October 8, 2018). Available at SSRN: https://ssrn.com/abstract=3262366 or http://dx.doi.org/10.2139/ssrn.3262366

Yupeng Lin

National University of Singapore ( email )

15 Kent ridge drive
Singapore
Singapore

HOME PAGE: http://sites.google.com/site/scottlinyupeng/

Hojun Seo (Contact Author)

National University of Singapore ( email )

15 Kent Ridge Drive, Singapore 119245

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