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

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 show that managers in U.S. states that tightened enforcement of non-compete provisions are more likely to manage analyst expectations downward, consistent with labor market immobility exacerbating managers’ incentives to ensure that earnings expectations are met. 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.

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

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