Labor Unions and Income Smoothing
Sophia J. W. Hamm
Ohio State University (OSU) - Fisher College of Business
University of Hawaii at Manoa
Seoul National University
November 25, 2013
Accounting literature suggests that managers have incentives to manage earnings in a way that will enhance their relationship with stakeholders. While the literature has overwhelmingly focused on equity market participants, we study another important stakeholder group: labor unions. We predict that labor unions strengthen managerial incentives for income smoothing. Managers attempt to manage earnings downwards to shelter firm resources from rent-seeking labor unions. Managers also have incentives to manage earnings upwards in bad times to avoid unions’ greater demand for compensation for expected bankruptcy risk perceived from worse operating performance. We find that income smoothing activities are positively associated with labor union strength, where such activities are measured by both discretionary income smoothing and R&D investment adjustments. The results are robust to endogeneity concerns and the use of various alternative measures of union strength.
Number of Pages in PDF File: 46
Keywords: Labor unions, Income smoothing, Earnings management
JEL Classification: M41, M43, J53
Date posted: October 7, 2012 ; Last revised: November 26, 2013
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