Key Talent Outflow and Stock Price Crash Risk: Evidence from the Rejection of the Inevitable Disclosure Doctrine
48 Pages Posted: 11 Dec 2019 Last revised: 10 Apr 2021
Date Written: April 10, 2021
We document that an increased likelihood of losing important stakeholders like key talents can lead to a higher stock price crash risk. Our test exploits U.S. state courts’ staggered rejections of the inevitable disclosure doctrine (IDD), which improves the ability of key talent to switch jobs. Relative to unaffected firms, we find that firms experience a significantly increased stock price crash risk after the states where they are headquartered reject the IDD. This effect is stronger for firms that face more industry competition and rely more heavily on key talents. Additional evidence shows that rejection of the IDD dampens firms’ competitive advantages to some extent. Overall, consistent with the view that a loss of key personnel can be an additional risk factor, our results suggest that an increased likelihood of key talent outflow can lead to bad news formation, which in turn results in stock price crashes.
Keywords: key talent outflow, crash risk, inevitable disclosure doctrine, labor mobility, stakeholder
JEL Classification: G32, G34, J01
Suggested Citation: Suggested Citation