Labor Union and Accounting Conservatism*

Abstract

We examine whether labor union contracts are a source of accounting conservatism. We argue that labor unions demand conservatism due to (i) their asymmetric payoff function with respect to firms’ net assets; (ii) their need in estimating firms’ economic rent; (iii) and their need in protecting themselves from managerial misbehavior. Firms are also willing to supply conservatism since they can increase their bargaining power with labor and reduce litigation costs. We find that firms become more conservative after they are unionized and that higher levels of unionization are associated with higher levels of accounting conservatism, supporting our predictions.

Keywords: Labor union, accounting conservatism

JEL Classification: M41