Inalienable Human Capital and Debt Choice: Evidence from Quasi-Exogenous Shocks

Hart and Moore (1994) theoretically analyze how inalienable human capital affects debt contracting. We examine, empirically, how firms address the increased threat of losing inalienable human capital by choosing between private and public debt: Following the staggered rejection of the inevitable disclosure doctrine (IDD) that facilitate the outflow of key talents to rivals, treated firms significantly increase the reliance on private debt financing. Evidence from state-level noncompete enforceability shocks further confirms our main findings. Our overall evidence indicates that flexible renegotiation and timely monitoring are important benefits of private debt in reacting to the risk of losing human capital.