Human Capital Outflow and Stock Price Crashes: Evidence from the Rejection of the Inevitable Disclosure Doctrine
52 Pages Posted: 11 Dec 2019
Date Written: November 24, 2019
We present evidence that human capital outflow can lead to a higher likelihood of stock price crashes. Our test exploit US state courts’ staggered rejection of the inevitable disclosure doctrine (IDD), which improves employees’ ability to switch employers. We find that after the rejection of IDD, firms headquartered in these states experience a significant increase in stock price crash risk relative to unaffected firms. This effect is stronger for firms under server financial distress, facing fierce industry competition, and relying heavily on human capitals. Overall, our results support the view that losing key talents is an important determinant for stock price crashes.
Keywords: human capital outflow, stock price crash risk, Inevitable disclosure doctrine, labor mobility, financial distress
JEL Classification: G32, G34, J01
Suggested Citation: Suggested Citation