Financial Reporting Quality and Labor Investment Efficiency
50 Pages Posted: 10 Jun 2013 Last revised: 5 Dec 2014
Date Written: June 9, 2013
We examine whether accounting quality is associated with efficient investments in labor. Consistent with high quality accounting mitigating market frictions that lead to sub-optimal levels of investment, we find evidence that abnormal net hiring (measured as the absolute deviation from net hiring predicted by economic fundamentals) is negatively associated with accounting quality. These results are robust to a battery of sensitivity tests and controls for other relevant factors, including labor power and other contemporaneous investments. We further examine the channels through which accounting quality improves net hiring efficiency and provide evidence that high quality accounting reduces both over-investment in labor (over-hiring and under-firing) and under-investment in labor (under-hiring and over-firing). We also show that the effect of accounting quality on net hiring efficiency is particularly strong in highly unionized industries. Finally, we also document that abnormal net hiring is costly, in that it is associated with lower future profitability. Overall, our results suggest that accounting quality improves the efficiency of investments in labor, a key factor of production, and contribute to the emerging literature on the effects of accounting on firms’ investment decisions.
Keywords: Accounting quality, Investment efficiency, Labor investment, Hiring
JEL Classification: M41
Suggested Citation: Suggested Citation