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Enforceability of non-compete covenants, discretionary investments, and financial reporting practices: Evidence from a natural experiment

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  • Chen, Tai-Yuan
  • Zhang, Guochang
  • Zhou, Yi

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.

Suggested Citation

  • Chen, Tai-Yuan & Zhang, Guochang & Zhou, Yi, 2018. "Enforceability of non-compete covenants, discretionary investments, and financial reporting practices: Evidence from a natural experiment," Journal of Accounting and Economics, Elsevier, vol. 65(1), pages 41-60.
    • Handle: RePEc:eee:jaecon:v:65:y:2018:i:1:p:41-60
    DOI: 10.1016/j.jacceco.2017.11.012
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    More about this item

    Keywords

    Contract enforceability; Non-compete covenants; Discretionary investment; Financial reporting;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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