Growing Pains: The Effect of Labor Mobility on Corporate Investment over the Business Cycle

Abstract

Procyclical growth opportunities and labor demand create time series-variation in the importance of labor mobility for corporate investment. Firms located in more mobile labor markets, captured by variation in state courts’ enforcement of covenants not to compete, increase investment rates more during economic expansions. This increased investment is associated with higher sales growth rates, profits, and valuations. Firms appear to finance this additional investment by raising debt and equity. Overall, our results suggest that access to a larger pool of workers with relevant experience reduces an important friction that dampens growth by constraining investment during economic expansions.

Keywords: Investment, Growth, Performance, Noncompete, Business cycles

JEL Classification: G31, G32, K12, K31, M5