Executives choose more conservative capital structures when they face greater unemployment risk due to mobility restrictions. Following an increase in the enforceability of non-compete agreements (NCAs), which exogenously increases executives’ unemployment risk by limiting their outside options, firms that face high competition in the labor market decrease their leverage. Increased enforceability of NCAs also decreases the proprietary information loss risk for firms. I exploit the incongruence between the location of the firms’ headquarters and major operations to empirically distinguish between the two key channels. The results point to the emergence of a risk-related agency conflict stemming from inflexible labor markets.
|Publication status||Submitted - Dec 19 2020|