Enforceability of Non-Compete Covenants, Discretionary Investments, and Financial Reporting Practices: Evidence from a Natural Experiment

50 Pages Posted: 20 Jul 2017

See all articles by Tai-Yuan CHEN

Tai-Yuan CHEN

Department of Accounting, HKUST Business School, Hong Kong University of Science & Technology

Guochang Zhang

University of Hong Kong

Yi Zhou

Fudan University

Date Written: July 17, 2017

Abstract

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

Chen, Tai-Yuan and Zhang, Guochang and Zhou, Yi, Enforceability of Non-Compete Covenants, Discretionary Investments, and Financial Reporting Practices: Evidence from a Natural Experiment (July 17, 2017). Journal of Accounting & Economics (JAE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=3004250

Tai-Yuan Chen

Department of Accounting, HKUST Business School, Hong Kong University of Science & Technology ( email )

Clear Water Bay
Kowloon
Hong Kong

Guochang Zhang (Contact Author)

University of Hong Kong ( email )

KK Leung Building
Faculty of Business and Economics
Hong Kong
+852 3917 1076 (Phone)

Yi Zhou

Fudan University ( email )

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

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