Labor Union and Accounting Conservatism*

55 Pages Posted: 31 Aug 2009

See all articles by Winnie Siu Ching Leung

Winnie Siu Ching Leung

The Chinese University of Hong Kong

Oliver Zhen Li

National University of Singapore (NUS)

Oliver M. Rui

China Europe International Business School (CEIBS)

Date Written: August 27, 2009

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

Suggested Citation

Leung, Siu Ching and Li, Oliver Zhen and Rui, Oliver M., Labor Union and Accounting Conservatism* (August 27, 2009). AAA 2010 Financial Accounting and Reporting Section (FARS) Paper. Available at SSRN: https://ssrn.com/abstract=1462594 or http://dx.doi.org/10.2139/ssrn.1462594

Siu Ching Leung

The Chinese University of Hong Kong ( email )

Shatin, N.T.
Hong Kong
Hong Kong

Oliver Zhen Li

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

Oliver M. Rui (Contact Author)

China Europe International Business School (CEIBS) ( email )

699 Hong Feng Road
Pudong
Shanghai 201206
China
86-21-28905618 (Phone)
86-21-28905620 (Fax)

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