Enforceability of Noncompetition Agreements and Forced CEO Turnover

Abstract

We examine whether corporate boards factor the potential cost of competitive harm caused by a departing CEO into the forced CEO turnover decision. Using staggered changes in the state-level enforceability of Covenants Not to Compete (CNC) for identification, we find that enhanced CNC enforceability increases both the likelihood of forced CEO turnover and the sensitivity of forced CEO turnover to firm performance. We present additional cross-sectional evidence that shows such effects are more pronounced when firms face more severe product market threats or operate in industries with greater potential threats of predatory hiring. Investors react to turnover announcements more positively when CNC enforceability increases, indicating that enhanced CNC enforceability increases efficiency in CEO replacement decisions.