Growing Pains : The Effect of Labor Mobility on Corporate Investment over the Business Cycle

Procyclical investment opportunities and labor demand create time series-variation in the importance of labor mobility for corporate investment. Firms located in more mobile labor markets, captured by variation in state courts’ enforcement of covenants not to compete, increase investment rates more during economic expansions. This effect is stronger for younger firms and those with fewer employees that rely more on recruiting skilled and experienced workers to grow. This increased investment is also associated with higher sales growth rates, profits, and valuations. Overall, our results suggest that greater labor mobility reduces an important friction that constrains investment during economic expansions