Key Talent Outflow and Stock Price Crash Risk: Evidence from the Rejection of the Inevitable Disclosure Doctrine

We document that an increase in the likelihood of key talent outflow leads to a higher stock price crash risk. Our test exploits U.S. state courts’ staggered rejections of the inevitable disclosure doctrine (IDD), which improves the ability of key talent to switch jobs. Relative to unaffected firms, we find that firms experience a significantly increased stock price crash risk after the states where they are headquartered reject the IDD. This effect is stronger for firms that face more industry competition and rely more heavily on key talent. Additional evidence shows that rejection of the IDD dampens firms’ fundamentals and increases their distress risk. Overall, consistent with the view that a loss of key personnel can be an additional risk factor, our results suggest that an increased likelihood of key talent outflow can lead to performance deterioration and hence bad news formation, which in turn results in stock price crashes.