Restrictions on Managers’ Outside Employment Opportunities and Asymmetric Disclosure of Bad versus Good News

This study examines the effect of restrictions on managers’ outside employment opportunities on voluntary corporate disclosure. The recognition of the Inevitable Disclosure Doctrine (IDD) by courts in the U.S. states in which the firms are headquartered place greater restrictions on the managers from joining or forming a rival company upon their dismissal. We show that asymmetric withholding of bad news relative to good news is greater in states that recognize the IDD than in other states, and that this effect is weaker in firms with greater institutional ownership, analyst following, and board independence. These results suggest that restrictions on managers’ outside employment opportunities have a significant unintended effect on corporate disclosure behavior. We further validate this conclusion by showing that the asymmetric withholding of bad news relative to good news is greater in states with stricter enforcement of noncompetition agreements, employment contracts that prohibit employees from joining or forming a competing firm. We also document that the effects of the IDD and non-competition agreements on disclosure are incremental to each other.