The Impact of Labor Mobility Restrictions on Managerial Actions: Evidence from the Mutual Fund Industry

Abstract

This paper examines how labor mobility restrictions such as non-compete clauses in employment contracts affect the incentives and resulting behavior of employees. Using the investment industry as a testing laboratory, we find that mutual fund managers respond to heightened career concerns due to increased enforceability of non-compete clauses by increasing effort, reducing downside risk, engaging less in tournaments, making their portfolios similar to the portfolios of their benchmarks or peers, and increasing window-dressing. These concerns are, however, moderated by the presence of more developed internal labor markets, which allow managers to substitute restricted across-family mobility with within-family mobility.

The impact of labor mobility restrictions on managerial actions: Evidence from the mutual fund industry

“…In sum, our analysis strongly suggests that one of the ways in which fund managers try to offset heightened career concerns due to increased NCC enforceability is by increasing the level of their portfolio window dressing. This finding is consistent with Chen, Zhang, and Zhou (2018) who show that management of public companies engaged in more earnings management following increased NCC enforceability.…”

“… See Fallick, Fleischman, and Rebitzer (2006) andMarx, Strumsky, and Fleming (2009) for earlier evidence and Jeffers(2018) for more recent evidence on the extent to which NCCs restrict labor mobility.…”

Knowledge spillovers in the mutual fund industry through labor mobility

“…This time span between the end date at the originating family and start date at the recipient family is likely due to non-compete clauses in employment contracts used by mutual fund families to restrict portfolio manager mobility (e.g., Cici, Hendriock, and Kempf 2019). We chose to restrict it to less than 36 months because noncompete clauses restrict their employees to not work for a competitor typically for up to three years.…”

“…3 Second, fund families might seek to limit the knowledge that a manager can transfer when she moves. For example, many fund families use non-compete or garden-leave clauses in employment contracts, which delay the actual time when the departing manager can start working at the new family, as a way of preventing these managers from transmitting up-to-date information to their new employers (e.g., Cici, Hendriock, and Kempf 2019). 4 Therefore, whether knowledge spillovers happen across fund families or not is an empirical question.…”