Financial Reporting Quality and Labor Investment Efficiency

50 Pages Posted: 10 Jun 2013 Last revised: 5 Dec 2014

See all articles by Boochun Jung

Boochun Jung

University of Hawaii - School of Accountancy

Woo-Jong Lee

Seoul National University

David P. Weber

University of Connecticut - Department of Accounting

Date Written: June 9, 2013

Abstract

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

Jung, Boochun and Lee, Woo-Jong and Weber, David P., Financial Reporting Quality and Labor Investment Efficiency (June 9, 2013). Contemporary Accounting Research 31(4), pp. 1047-1076.. Available at SSRN: https://ssrn.com/abstract=2276761

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)

David P. Weber (Contact Author)

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

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