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

58 Pages Posted: 7 Jan 2016 Last revised: 14 Sep 2018

See all articles by Michael (Minye) Tang

Michael (Minye) Tang

New York University (NYU)

Rencheng Wang

Singapore Management University - School of Accountancy

Yi Zhou

Fudan University

Date Written: September 5, 2018

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

Suggested Citation

Tang, Michael and Wang, Rencheng and Zhou, Yi, Labor Market Mobility and Expectation Management: Evidence from Enforceability of Non-Compete Provisions (September 5, 2018). 2016 Canadian Academic Accounting Association (CAAA) Annual Conference, Available at SSRN: https://ssrn.com/abstract=2711331 or http://dx.doi.org/10.2139/ssrn.2711331

Michael Tang (Contact Author)

New York University (NYU) ( email )

Henry Kaufman Management Center
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New York, NY 10012-1126
United States
(212) 998-0087 (Phone)
(212) 995-4004 (Fax)

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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