46 Pages Posted: 7 Oct 2012 Last revised: 26 Nov 2013
Date Written: 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.
Keywords: Labor unions, Income smoothing, Earnings management
JEL Classification: M41, M43, J53
Suggested Citation: Suggested Citation
Hamm, Sophia J. W. and Jung, Boochun and Lee, Woo-Jong, Labor Unions and Income Smoothing (November 25, 2013). Available at SSRN: https://ssrn.com/abstract=2158081 or http://dx.doi.org/10.2139/ssrn.2158081