Publication Type
Working Paper
Version
publishedVersion
Publication Date
10-2017
Abstract
We study the impact of managers’ career concerns from non-competes enforcement on the design of debt covenants in private debt agreements. Using exogenous changes in the enforceability of managers’ non-compete clauses over the period of 1992-2004 across states in the United States, we show that borrowers headquartered in U.S. states with strong enforcement of non-compete clauses have fewer debt covenants compared to those headquartered in states with weak enforcement after controlling for reporting quality, risk taking, and firm performance. Our evidence is consistent with the argument that reduced job mobility and enhanced career concerns incentivize managers to ex ante avoid debt covenants that may trigger default and lead to high risk of terminating their current employment. Moreover, the effect of the enforceability of noncompetes on debt covenants is more pronounced for managers with limited outside options (i.e., low ability, small network) or firms with strong bargaining power with lenders.
Keywords
Non-Compete Clauses, Career Concerns, Debt Covenants
Discipline
Accounting
Research Areas
Corporate Reporting and Disclosure
First Page
1
Last Page
57
Publisher
SSRN
Citation
LOU, Yun; WANG, Rencheng; and ZHOU, Yi.
Non-competes, career concerns, and debt covenants. (2017). 1-57.
Available at: https://ink.library.smu.edu.sg/soa_research/1854
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.