Publication Type

Journal Article

Version

submittedVersion

Publication Date

6-2021

Abstract

This study examines how managers' use of expectation management is affected by their labor market mobility, which we measure by the enforceability of noncompete provisions in their employment contracts. Exploiting quasinatural experiments, our difference-in-differences analyses provide new causal insights to the growing literature on how managers' career concerns affect their disclosure choices. Consistent with a less mobile labor market imposing more pressure on managers to achieve earnings expectations, we predict and find that managers in US states that tightened enforcement of noncompete provisions are more likely to manage analyst expectations downward. 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 noncompete 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 noncompete enforcement reduces executive labor market mobility. Our study sheds light on the underlying mechanism through which labor market mobility affects disclosure choices and has important implications for both firms and regulators on the use and enforcement of noncompete provisions.

Keywords

Labor market mobility, Non-compete enforcement, Expectation management, Managerial career concern

Discipline

Accounting | Corporate Finance | Portfolio and Security Analysis

Research Areas

Corporate Reporting and Disclosure

Publication

Contemporary Accounting Research

Volume

38

Issue

2

First Page

867

Last Page

902

ISSN

0823-9150

Identifier

10.1111/1911-3846.12645

Publisher

Canadian Academic Accounting Association

Embargo Period

4-26-2022

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1111/1911-3846.12645

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