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

This study examines how managers’ use of expectation management is affected by labor market mobility, measured with the enforceability of non-compete provisions in employment contracts. We find that managers in states with stricter non-compete enforcement are more likely to manage analyst expectations downward, consistent with labor market immobility exacerbating managers’ incentives to ensure meeting expectations. Moreover, we find the effect to be more pronounced for less capable and more junior CEOs, for firms with more intense monitoring, and for firms in more homogenous or more competitive industries. Results from quasi-natural experiments and instrumental variable approach suggest that non-compete enforcement causally affects the use of expectation management. Finally, investors seem to discount the premium on achieving earnings targets through expectation management for firms in high non-compete enforceability states.