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, measured by the enforceability of non-compete provisions in their employment contracts. Exploiting quasi-natural experiments, our difference-in-difference analyses show that managers in states that tightened enforcement of non-compete provisions are more likely to manage analyst expectations downward, consistent with labor market immobility exacerbating managerial incentives to meet earnings expectations. Furthermore, the 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 usage of expectation management is more pronounced for CEOs with lower ability or shorter tenure, for firms with more intense monitoring, and for firms in industries that are more homogeneous or more competitive within the state. We also find that investors further discount the premium for firms that achieve earnings targets through expectation management in high non-compete enforceability states.

Keywords: Labor market mobility, Non-compete provision, Expectation management

JEL Classification: G14, M41