Trade Secrets Protection and Antitakeover Provisions

Abstract

How do firms protect their human capital? We test whether firms facing an increased threat of being acquired strengthen their antitakeover provisions (ATPs) in order to bond with their employees. We use the adoption of the Inevitable Disclosure Doctrine (IDD) by US state courts, which exogenously decreases knowledge-worker mobility, thus elevating takeover risk and reducing employee incentives to innovate. Firms respond to IDD adoption by strengthening ATPs that defend against hostile takeovers, especially when they have greater ex-ante human capital and place greater importance on employee relations. Ex-post increases in employee morale, productivity, innovation, and accounting performance suggest that strengthening ATPs helps offset the negative consequences of IDD adoption. Our findings show that ATPs can be used to credibly commit to employees in order to protect long-term value creation.