Enforceability of Non-Compete Covenants, Discretionary Investments, and Financial Reporting Practices: Evidence from a Natural Experiment
50 Pages Posted: 20 Jul 2017
Date Written: July 17, 2017
Non-compete covenants are widely used in employment contracts to promote employee stability. Using legal amendments of non-compete enforceability as a natural experiment, we find that as non-compete enforceability increases, firms display an increased likelihood of meeting short-term earnings benchmarks, lower discretionary expenditures, and declining future performance. These effects are more pronounced when CEOs have lower ability or shorter tenures, and when firms have more growth opportunities or operate in localized industries. Our results suggest that managers actively adapt investment and financial reporting practices to the changing environment that affects their contractual relations with firms.
Keywords: Contract enforceability; Non-compete covenants; Discretionary investment; Financial reporting
JEL Classification: D22; D86; G30; K12; M41
Suggested Citation: Suggested Citation