Labor Skill and Accounting Conservatism

55 Pages Posted: 23 Mar 2022 Last revised: 30 Nov 2023

See all articles by Jeff Zeyun Chen

Jeff Zeyun Chen

Texas Christian University

Youngki Jang

University of Delaware

Boochun Jung

University of Hawaii at Manoa - School of Accountancy

Minyoung Noh

California State University, Los Angeles - Department of Accounting

Date Written: January 25, 2022

Abstract

We examine the role of labor market frictions in shaping firms’ accounting policies. We find that firms’ reliance on high-skill labor is negatively related to accounting conservatism, presumably because higher labor adjustment costs make conservative accounting policies more costly. Cross-sectional tests further support the notion that labor adjustment costs are the main driver for the negative relation between labor skill and accounting conservatism. Specifically, the negative relation is more pronounced when a firm i) operates in more competitive industries, ii) has a higher voluntary employee turnover rate, and iii) is more financially constrained. Finally, we show that the positive implication of accounting conservatism for future operating performance and cost of debt is weaker for firms requiring high labor skill, providing plausible explanations for a negative relation between labor skill and accounting conservatism. Collectively, we provide novel evidence on the relation between labor force heterogeneity and accounting conservatism.

Keywords: Labor skill, conservatism, labor adjustment costs, competition, employee turnover, financial constrain

JEL Classification: G30, J01, M41

Suggested Citation

Chen, Jeff Zeyun and Jang, Youngki and Jung, Boochun and Noh, Minyoung, Labor Skill and Accounting Conservatism (January 25, 2022). Journal of Accounting and Public Policy, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4017970 or http://dx.doi.org/10.2139/ssrn.4017970

Jeff Zeyun Chen

Texas Christian University ( email )

2900 Lubbock Ave
Fort Worth, TX 76109
United States

Youngki Jang

University of Delaware ( email )

Newark, DE 19716
United States

Boochun Jung (Contact Author)

University of Hawaii at Manoa - School of Accountancy ( email )

College of Business Administration
Honolulu, HI 96822
United States

Minyoung Noh

California State University, Los Angeles - Department of Accounting ( email )

Los Angeles, CA 90032-8121
United States

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