Recognizing Noncompete Agreements as Intangible Assets: A Proposal for Capitalizing a Proxy for Human Capital

SYNOPSIS Employees are becoming increasingly essential to high-performing firms in knowledge-based economies; however, their value is typically not recognized as a distinct asset in accounting. We argue that employee noncompete agreements (restraints of trade) may satisfy the definition of an intangible asset as per current standards. Using the New Zealand setting, in which companies must disclose the number of employees earning more than NZ$100,000, we estimate the value of a noncompete asset. Pro forma capitalization significantly improves the return on asset and leverage ratios and reduces the market-to-book ratio. Furthermore, these changes result in accounting numbers that better explain firm value but only for high-intangible firms and those in human capital-intensive industries. Overall, we provide evidence supporting the capitalization of a component of human capital that is likely controlled by the firm. Our research contributes to the long and contentious debate on intangible capitalization. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M41; M48; E22.