THESIS
2013
Abstract
Essay I: The Effects of Non-compete Covenants on Earnings Management Activities:
Evidence from A Natural Experiment
Non-compete covenants ubiquitously appear in employment contracts for top
executives and specialized technicians in the U.S, and they have been shown to effectively
constrain labor market mobility and promote employee stability. Using regulatory changes in
enforceability of non-competes as a natural experiment, we show that labor market frictions
significantly affect financial reporting practices. Specifically, we find that increased
non-compete enforceability leads managers to attach more importance to meeting short-term
earnings benchmarks, and thus to increase the use of real transaction management (e.g., cut
R&D expenses) as well as accrual manipulation to m...[
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Essay I: The Effects of Non-compete Covenants on Earnings Management Activities:
Evidence from A Natural Experiment
Non-compete covenants ubiquitously appear in employment contracts for top
executives and specialized technicians in the U.S, and they have been shown to effectively
constrain labor market mobility and promote employee stability. Using regulatory changes in
enforceability of non-competes as a natural experiment, we show that labor market frictions
significantly affect financial reporting practices. Specifically, we find that increased
non-compete enforceability leads managers to attach more importance to meeting short-term
earnings benchmarks, and thus to increase the use of real transaction management (e.g., cut
R&D expenses) as well as accrual manipulation to meet the targets. This phenomenon is more
pronounced for CEOs with lower ability and shorter tenure with the current employer.
Overall, our findings suggest that managers aggressively adapt their financial reporting
practices in response to labor market distortions caused by changes in legal infrastructure.
Essay II: Family-owned Banks and Fair Value Reporting Quality
Using a sample of U.S. banks, we investigate the impacts of founding family
ownership on the reporting quality of fair value measurements. We find that after controlling
for corporate governance, managerial ownership, and other known determinants, fair value
assets reported by family-owned banks are of higher quality than those of widely-held banks.
Specifically, investors consider Level 3 assets measured by the mark-to-model approach to be
value-relevant when disclosed by family-owned banks, but not so when reported by
widely-held banks. Moreover, the initial disclosure of Level 3 assets by widely-held banks
triggers significantly negative market reactions, whereas there is no such effect for
family-owned banks. Finally, Level 3 assets reported by family-owned banks have stronger
relationships with future profitability than those by widely-held banks, suggesting that
family-owned banks are less likely to overstate mark-to-model assets. Overall, our findings
suggest that family ownership has significant effects on fair value reporting quality.
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