Labor Market Mobility and Expectation Management: Evidence from Enforceability of Non-Compete Provisions

Posted: 11 Dec 2020

See all articles by Michael (Minye) Tang

Michael (Minye) Tang

Florida International University (FIU)

Rencheng Wang

Singapore Management University - School of Accountancy

Yi Zhou

Fudan University

Multiple version iconThere are 2 versions of this paper

Date Written: September 2, 2020

Abstract

This study examines how managers’ use of expectation management is affected by their labor market mobility, which we measure by the enforceability of non-compete provisions in their employment contracts. Exploiting quasi-natural experiments, our difference-in-differences analyses provide new causal insights to the growing literature on how managers’ career concerns affect their disclosure choices. Consistent with a less mobile labor market imposing more pressure on managers to achieve earnings expectations, we predict and find that managers in U.S. states that tightened enforcement of non-compete provisions are more likely to manage analyst expectations downward. We also find that downward expectation management is used to a greater extent than other tools such as real and accrual-based earnings management. Additional analysis shows that the increase in expectation management is more pronounced for CEOs with lower general skills or shorter tenures, for firms with more independent boards, and for industries that are more homogeneous. Our path analysis suggests a significant link between increased use of expectation management after tightened non-compete enforcement and meeting and beating earnings expectations, which in turn is linked to lower executive turnover. Overall, our findings suggest that expectation management is an important channel through which non-compete enforcement reduces executive labor market mobility. Our study sheds light on the underlying mechanism through which labor market mobility affects disclosure choices and has important implications for both firms and regulators on the use and enforcement of non-compete provisions.

Keywords: Labor Market Mobility, Non-Compete Enforcement, Expectation Management, Managerial Career Concern

JEL Classification: G14, J60, K12, M41, M50

Suggested Citation

Tang, Michael and Wang, Rencheng and Zhou, Yi, Labor Market Mobility and Expectation Management: Evidence from Enforceability of Non-Compete Provisions (September 2, 2020). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3740534

Michael Tang (Contact Author)

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Rencheng Wang

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Yi Zhou

Fudan University ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

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