Enforcement of Non-Compete Agreements, Outside Employment Opportunities, and Insider Trading
Posted: 16 Dec 2017 Last revised: 31 May 2023
Date Written: 2023
Abstract
Enforcement of non-compete agreements could affect executives’and directors’incentives to profitfrom their information advantage. This is because excessive trading profits could result in job ter-mination, which would trigger the restrictions imposed by the non-compete agreements. Wefindthat executives’and directors’insider trading profits from sales are lower for companiesheadquartered in states with greater enforcement of non-compete agreements. The path analysessuggest that high enforcement of non-compete agreements disincentivizes managers to profit fromtheir information advantage to avoid the possibility of job termination and the cost of job termina-tions. We alsofind that insiders in companies headquartered in states with greater enforcement ofnon-compete agreements are less likely to exploit their information advantage by timing their salesbefore unfavorable corporate earnings announcements. The results suggest that enforcement ofnon-compete agreements reduces executives’and directors’incentives by imposing costs on futureoutside employment opportunities.
Keywords: non-compete, labor mobility, insider trading, career concern, job termination
JEL Classification: M55, J62, G14
Suggested Citation: Suggested Citation