Ties That Blind - The Impact of Non-Compete Provisions on the Tone of Earnings Press Releases

Abstract

Earnings press releases are a timely vehicle for communicating a firm's performance and can be used to manipulate the perception of the managers' achievements. We argue in this paper that the enforcement of non-compete provisions in CEO employment contracts induce managers to manipulate the qualitative information contained in earnings press releases to minimize their exposure to forced terminations. Based on a sample of 26,000 earnings press releases of S&P1500 firms between 2004 and 2013, we are the first to directly show that, in order to attenuate their career concerns, managers in states with a higher enforceability of non-compete provisions are more likely to manipulate upward the tone of their earnings press releases. Moreover, we find that the effect is more pronounced for less capable and more junior CEOs, for firms with more intense monitoring, and for firms in more competitive industries. Consistent with investors recognizing the impact of non-compete provision enforcement on managers' strategic use of words, we further find a statistically and economically significant incremental discount by investors on the tone of earnings press releases of firms in high enforceability states.