Labor Unions and Real Earnings Management

55 Pages Posted: 22 Jul 2022

See all articles by Kiyoung Chang

Kiyoung Chang

University of South Florida Sarasota-Manatee - College of Business

Young Sang Kim

Northern Kentucky University - Haile/US Bank College of Business

Ying Li

University of Washington, Bothell - Business

Jong Chool Park

University of South Florida - School of Accountancy

Date Written: July 6, 2022

Abstract

Using firm-level union membership data for the period of 2002–2016, we show that firms with higher union membership are more likely to engage in real earnings management than accrual-based earnings management, with abnormal production as the dominant form of real earnings management. We further show the causal effect of union membership on real earnings management by exploiting two natural experiments-the staggered enactment of state-level right-to-work (RTW) laws and the shock to unemployment insurance benefits (UIB)-as exogenous shocks to union power. Further exploration shows that the positive association between union membership and real earnings management is more pronounced for unionized firms with (1) high managerial incentives to reduce employee hiring and retention costs and (2) operating inflexibility created by labor overinvestment. Our evidence is consistent with managerial incentives for upward earnings management to mitigate employees’ perceived job security and the cost of employee management in competitive labor markets.

Keywords: Labor unions, real earnings management, abnormal production

JEL Classification: J51, G30, G33, M41

Suggested Citation

Chang, Kiyoung and Kim, Young Sang and Li, Ying and Park, Jong Chool, Labor Unions and Real Earnings Management (July 6, 2022). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4161056

Kiyoung Chang

University of South Florida Sarasota-Manatee - College of Business ( email )

8350 N. Tamiami Trail, SMC-C263
Sarasota, FL 34243-2025
United States
9413594359 (Phone)
9413594367 (Fax)

Young Sang Kim (Contact Author)

Northern Kentucky University - Haile/US Bank College of Business ( email )

Dept of Economics and Finance
Highland Heights, KY 41099
United States
859-572-5160 (Phone)
859-572-6627 (Fax)

Ying Li

University of Washington, Bothell - Business

18115 Campus Way NE
Bothell, WA 98011-8246
United States

Jong Chool Park

University of South Florida - School of Accountancy ( email )

4202 E. Fowler Avenue, BSN 3403
Tampa, FL 33620-5500
United States

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