Labor Unemployment Insurance and Earnings Management
48 Pages Posted: 30 Jul 2014 Last revised: 5 Jun 2015
Date Written: June 4, 2015
We provide new evidence that firms appear to manage long-run earnings upward in order to manage rank and file employees’ perceptions of employment security. In particular, we exploit exogenous state-level changes in unemployment insurance benefits and test for partial unwinding of prior upward earnings management when benefits increase. Consistent with the hypothesis, we find a significant reduction in abnormal accruals, increased recognition of special items and write downs, and greater likelihood of net income-reducing restatements, following an increase in state-level unemployment benefits. A number of cross-sectional results are also consistent with the hypothesis.
Keywords: Earnings management, labor economics, unemployment risk
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