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Review of Accounting Studies

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18.09.2017

Employee mobility, noncompete agreements, product-market competition, and company disclosure

verfasst von: Daniel Aobdia

Erschienen in: Review of Accounting Studies | Ausgabe 1/2018

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Abstract

This study explores the impact on companies’ disclosures of U.S. states’ different propensities to enforce noncompete agreements. I find a negative association between a state’s enforcement of noncompete agreements and disclosure activities of firms headquartered in that state. Companies that face local rivals drive some results. Analyses that focus on several state-level changes in enforcement level of noncompete agreements confirm this association. Overall, the findings are consistent with a higher enforcement of noncompete agreements increasing proprietary costs of disclosure, because companies in high-enforcement settings are less informed about each other due to reduced information leakage from employee transfers across competitors. The results suggest that the overall environment for information spillovers surrounding a firm impacts its degree of disclosure to the capital markets and that state-specific enforcement of noncompete agreements can be used as a novel measure of the proprietary costs of disclosure.

Vorheriger Artikel R&D investments, capital expenditures, and earnings thresholds

Nächster Artikel Financial reporting changes and the internal information environment: Evidence from SFAS 142

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Starr et al. (2017) find that 18% of employees in the labor force in 2014 are working under a noncompete agreement, and that 38% of employees sign a noncompete agreement at some point in their life. The proportions are much higher for employees working in high-skill, high paying jobs that involve trade secrets. Anecdotal evidence also indicates that noncompete agreements are not restricted to top executives. As reported in the Wall Street Journal, “Once largely aimed at top executives, noncompetes are ‘reaching wider and deeper within organizations’ to include sales representatives, engineers and people involved in research and innovation, says Paul Greco, counsel at the law firm Buchanan Ingersoll & Rooney” (Simon and Loten 2013).

Survey results are available at http://www.shrm.org/Pages/default.aspx.

This variable is based on a detailed analysis of individual states’ regulations on noncompete agreements, and has been gaining traction in industrial organization, finance, and accounting literatures (e.g., Samila and Sorenson 2011; Acharya et al. 2014; Belenzon and Schankerman 2013; Aobdia 2015; Ertimur et al. 2017).

It is unclear which jurisdiction applies when employees transfer from one state to another. Some states have voided noncompete agreements issued in other states (Kahn 1999). The scope of noncompete agreements is also often restricted to the state where they are issued.

Garmaise (2011) and Aobdia (2015), in different settings, also focus on enforcement changes in the state of Texas.

These results usually contrast with theoretical literature that addresses disclosure in the context of an entrant and an incumbent. Several papers show that proprietary costs, in the context of an entry game, can lead to an outcome equivalent to full disclosure (Darrough and Stoughton 1990; Wagenhofer 1990). In this paper, my focus is on within-industry competition and not on the threat of entry.

Clinch and Verrecchia (1997), in the context of a Cournot duopoly, endogenize the proprietary costs of disclosure and find that the disclosure interval is reduced when the intensity of competition increases. However, in contrast to Verrecchia (1983), they find that the nondisclosure region applies for very high and very low demand.

In a related study, Li et al. (2017) finds a lower level of disclosure in states that adopt the inevitable disclosure doctrine.

This is evidenced by extensive interactions between former colleagues at competing firms in Silicon Valley (Saxenian 1994; Gilson 1999; Hyde 2011).

Starr et al. (2017) also report that the vast majority of employees do not negotiate the terms of noncompete agreements.

Firms could have additional locations in states where the level of enforcement of noncompete agreements is different than at the headquarters. This is unlikely to be an issue in my study, as at worst it would bias the results toward the null. In addition, the type of information that would be disclosed by the firm to the capital markets arguably is more likely to be available at the headquarters than at other locations. In general, the use of the headquarters to proxy for the location of the firm has been extensive in the literature (e.g. Hilary and Hui 2009; Ivkovic and Weisbenner 2005; Agrawal and Matsa 2013).

Two employees of rival firms sitting close to each other in a plane could also transmit information. Investment bankers are explicitly told not to discuss client pitches in planes, lest rival teams overhear the conversation and target the prospective client.

The competition variable is assessed using the primary historical NAICS code of the firm taken from Compustat. The NAICS has several advantages over other classifications. First, it is more up to date than the Standard Industrial Classification (SIC) system. Second, it is more granular than the others, which allows for determining more directly the true product-market rivals. I use in my analyses only companies that have an NAICS code properly defined at the six-digit level.

The sample covers the fiscal years from 1998 to 2013 when using the I/B/E/S management forecast database, from 2002 to 2013 when using the measures built from Capital IQ, and from 1985 to 2011 when using the disclosure quality measures from Chen et al. (2015).

Firms are mandated to file a form 8-K to the SEC shortly after the occurrence of specific events, such as a restatement or a change in auditors. Detailed SEC requirements are available at https://www.sec.gov/files/form8-k.pdf. I consider a disclosure to be mandatory if it is included in the requirements that trigger the filing of a form 8-K.

At minimum Capital IQ should record four mandatory disclosures during the year corresponding to the release of the firm’s financial statements. Using a threshold of ten ensures that Capital IQ properly monitors the firm during the year. See subsection 5.6 for analyses based on different thresholds.

Because Thomson Financial discontinued First Call in 2012, I was unable to obtain management forecast data from this database. Thomson replaced First Call with a separate management forecast feed from I/B/E/S. However, the data are widely populated only from 1998 and may suffer from the same issues described in Chuk et al. (2012).

Because Ali et al. (2015) find an association between enforcement of noncompete agreements and the asymmetric disclosure of bad news versus good news, a concern in the analyses using MgmtForecast as the dependent variable is that the results could be driven by a lessened disclosure of bad news. I use GoodMgmtForecast, which is related only to disclosure of good news, to address this concern.

In all the analyses, continuous variables are winsorized at the 1st and 99th percentiles to reduce the influence of outliers in the specifications.

Industries with SIC codes 2833–2836, 3570–3577, 7370–7374, 3600–3674, 5200–5961, and 8731–8734 are classified as high litigation risk.

Several NAICS industries span more than one two-digit NAICS code. For example manufacturing corresponds to NAICS codes 31, 32, and 33. I consolidate these into one fixed effect.

I use County Business Patterns data available from 1998 to 2011 in these tests. The sample size is reduced accordingly.

The data are available at http://www.census.gov/geo/maps-data/data/gazetteer.html. See Ivkovic and Weisbenner (2005, p. 271) for the distance formula. Because the zip code is not available for all firms in Compustat, this slightly reduces the sample.

Ertimur et al. (2017) identify additional changes outside of the 1991–2004 period covered by Garmaise. However, these changes did not modify the noncompete agreement enforcement score by more than one, and they appear incremental. Thus, I mainly focus on the three changes discussed by Garmaise.

I primarily use OLS instead of logit because of the incorporation of a large number of fixed effects in the specifications. See Albert and Anderson (1984) for more details about issues of quasi-separation of the data when using logistic specifications.

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Titel: Employee mobility, noncompete agreements, product-market competition, and company disclosure
verfasst von: Daniel Aobdia
Publikationsdatum: 18.09.2017
Verlag: Springer US
Erschienen in: Review of Accounting Studies / Ausgabe 1/2018
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI: https://doi.org/10.1007/s11142-017-9425-z

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