Bundling Postemployment Restrictive Covenants: When, Why, and How It Matters

75 Pages Posted: 8 Apr 2021

See all articles by Natarajan Balasubramanian

Natarajan Balasubramanian

Syracuse University - Whitman School of Management

Evan Starr

University of Maryland Robert H Smith School of Business

Shotaro Yamaguchi

University of Maryland - Department of Management & Organization

Date Written: March 28, 2021

Abstract

Many of a firm’s most important informational or relational resources are at risk of diffusion to its competitors because they are embedded in the firm’s human capital. Using novel firm- and worker-level data, we present descriptive evidence on the adoption of and outcomes associated with four post-employment restrictive covenants (PERCs) that limit the diffusion of such resources to competitors: non-disclosure agreements (NDA), non-solicitation agreements, non-recruitment agreements, and non-compete agreements. We find that firms tend to adopt these PERCs together, with just three combinations (no PERCs, only an NDA, all four) covering more than 82% of workers and 70% of firms. We examine two rationales for why firms might bundle PERCs together—value creation and pure value capture—and draw out and test their implications both for worker and firm outcomes and for adoption. Our results suggest that pure value capture is the likely rationale for bundling PERCs with the average worker, while value creation is more applicable to top managers. Finally, we document how studying just one PERC can be misleading when such PERCs are bundled.

Keywords: Postemployment Restrictive Covenants, Value Capture, Value Creation, Isolating Mechanisms

JEL Classification: J31, J41, J42, K31

Suggested Citation

Balasubramanian, Natarajan and Starr, Evan and Yamaguchi, Shotaro, Bundling Postemployment Restrictive Covenants: When, Why, and How It Matters (March 28, 2021). Available at SSRN: https://ssrn.com/abstract=3814403 or http://dx.doi.org/10.2139/ssrn.3814403

Natarajan Balasubramanian

Syracuse University - Whitman School of Management ( email )

United States

Evan Starr (Contact Author)

University of Maryland Robert H Smith School of Business ( email )

United States
(301) 405-2320 (Phone)

Shotaro Yamaguchi

University of Maryland - Department of Management & Organization ( email )

United States

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