Labor Unions and Income Smoothing

46 Pages Posted: 7 Oct 2012 Last revised: 26 Nov 2013

Sophia J. W. Hamm

Ohio State University (OSU) - Fisher College of Business

Boochun Jung

University of Hawaii - School of Accountancy

Woo-Jong Lee

Seoul National University

Date Written: November 25, 2013

Abstract

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

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

Sophia J. W. Hamm (Contact Author)

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-2529 (Phone)

Boochun Jung

University of Hawaii - School of Accountancy ( email )

College of Business Administration
Honolulu, HI 96822
United States

Woo-Jong Lee

Seoul National University ( email )

Gwanak-ro 1, Gwanak-gu
Seoul, 151-916
Korea, Republic of (South Korea)

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