Labor Unemployment Insurance and Earnings Management

48 Pages Posted: 30 Jul 2014 Last revised: 5 Jun 2015

See all articles by Yiwei Dou

Yiwei Dou

New York University (NYU) - Department of Accounting

Mozaffar Khan

University of Minnesota - Twin Cities - Carlson School of Management; Causeway Capital Management, LLC

Youli Zou

University of Connecticut

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Date Written: June 4, 2015

Abstract

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

Suggested Citation

Dou, Yiwei and Khan, Mozaffar and Khan, Mozaffar and Zou, Youli, Labor Unemployment Insurance and Earnings Management (June 4, 2015). Available at SSRN: https://ssrn.com/abstract=2473241 or http://dx.doi.org/10.2139/ssrn.2473241

Yiwei Dou

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street
Suite 10-180
New York, NY 10012
United States

Mozaffar Khan (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Causeway Capital Management, LLC

Youli Zou

University of Connecticut ( email )

School of Business
Storrs, CT 06269-2041
United States

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