How Anticipated Employee Mobility Affects Acquisition Likelihood: Evidence from a Natural Experiment

This study draws on strategic factor market theory and argues that acquirers' decisions regarding whether to bid for a firm reflect their expectations about employee departure from the firm post-acquisition, suggesting a negative relationship between the anticipated employee departure from a firm and the likelihood of the firm becoming an acquisition target. Using a natural experiment and a difference-in-differences approach, we find causal evidence that constraints on employee mobility raise the likelihood of a firm becoming an acquisition target. The causal effect is stronger when a firm employs more knowledge workers in its workforce and when it faces greater in-state competition; by contrast, the effect is weaker when a firm is protected by a stronger intellectual property regime that mitigates the consequences of employee mobility.

Employee Mobility and the Appropriation of Value from Knowledge

Kenneth Younge

In this dissertation, I argue that employee mobility is a key consideration of the firm. Firms often rely on human assets to generate and maintain knowledge. When key individuals depart the firm, they take knowledge with them, potentially undermining the firm or helping competitors. Specifically, I theorize as to how the potential for employee departure affects firm value, and empirically examine my hypotheses in strategy contexts such as M&As, R&D, and equity investment. Across three studies, I find a consistent pattern of evidence to suggest employee mobility has economically significant and strategically important effects for the firm. In essay one, I argue that acquirers incorporate expectations about employee departure into M&A decisions. Using a natural experiment, I find causal evidence that constraints on employee mobility raise the likelihood that affected firms will become acquisition targets. This effect is stronger when firms are more exposed to negative consequences of employee mobility and weaker when firms are protected by intellectual property rights that can mitigate the consequences of employee mobility. In essay two, I argue that secrecy is a valuable, and even primary, mechanism for protecting knowledge. For firms to invest in R&D, it is essential that they are able to capture value from the knowledge that they create, and many firms use employee non-compete agreements to stem the leakage of secrets to competitors. I find causal evidence that constraints on employee mobility initially boost Tobin’s q by as much as 25%, but that the effect is eventually undone as firms are harmed by the slower circulation of talent and ideas, causing them to become more myopic in their R&D. In essay three, I argue that investors anticipate the potential for employee departure, resulting in a ‘mobility discount’ for firms exposed to greater costs of employee departure. I find evidence that firms with a high reliance on key scientists are discounted in the market by as much as 12%. The mobility discount increases when scientists are more central to the future growth opportunities of the firm, and decreases when firms enjoy legal protection from employee departure through the enforcement of non-compete agreements.

University of Colorado2012

Employee Mobility and the Appropriation of Value from Knowledge

Kenneth Younge

University of Colorado2012