Noncompete Agreements, Product-Market Competition and Company Disclosure

This study explores the impact on companies’ disclosure policies of U.S. states’ different propensities to enforce noncompete agreements. I find that, when facing rivals headquartered in the same state, companies headquartered in states where noncompete agreements are not enforced have more-forthcoming disclosure policies than companies headquartered in states where noncompete agreements are enforced. This is evidenced by more management forecasts, more discretionary disclosures in general, a larger analyst following and higher AIMR rankings. These findings are consistent with an increase in the proprietary costs of disclosure resulting from enforcement of noncompete agreements, because rivals know less about each other to begin with due to reduced information leakage from employee transfers across competitors. The results suggest that the overall environment for information spillover surrounding the firm impacts the 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.