FINANCIAL CONTRACTS, MANAGERIAL CHARACTERISTICS & CORPORATE INVESTMENT POLICY

Abstract

I study the relations between a non-monetary component of CEO compensation and firm investment policy. I focus on the incidence of non-compete clauses in new CEO contracts. Pundits suggest these clauses limit the future job mobility of CEOs and potentially affect their investment decisions. I discover that the contracts of 62.1 percent of 773 newly appointed S&P 1500 CEOs contain non-compete clauses. Contrary to expectations, I find that firms without reported R&D exhibit higher incidences of non-compete clauses. Additionally, I provide evidence that suggests the existence of a “compensation bundle” that entails a trade-off between the monetary and non-monetary components of CEO compensations. Non-compete clauses occur more prominently in small firms, and firms with externally appointed CEOs and female CEOs. In summary, I provide empirical evidence on the use of non-compete clauses across firm characteristics, CEO characteristics and CEO compensation.