Managerial labor-market discipline and the characteristics of merger and acquisition transactions

This study evaluates how state regulation of noncompetition agreements affects merger and acquisition activity. Noncompetition agreements put restrictions on postemployment activities, thereby reducing management mobility and forcing top managers to bear the long-term consequences of their corporate decisions. In this sense, state regulation of noncompetition agreements functions as a mechanism to align managementʹs interests with those of the shareholders when management makes major corporate decisions. To examine this hypothesis empirically, this study tests whether the legal enforcement of noncompetition agreements across states affects the choice of payment methods, the premium paid for targets, and the acquirersʹ abnormal returns on their merger or acquisition activity. The results suggest that stricter enforcement of noncompetition agreements significantly reduces the likelihood of using stock in takeovers and the premiums paid for targets. In addition, the study documents that stronger enforcement of noncompetition agreements is related with more favorable market reactions for large acquirers.