Labor Unemployment Insurance and Earnings Management

48 Pages Posted: 13 Aug 2014

See all articles by Yiwei Dou

Yiwei Dou

New York University (NYU) - Department of Accounting

Mozaffar Khan

Causeway Capital Management, LLC

Youli Zou

University of Connecticut

Multiple version iconThere are 2 versions of this paper

Date Written: August 11, 2014

Abstract

There is relatively little prior evidence on the potential impact of rank and file employees on financial reporting choices outside union negotiations. We contribute to the literature by providing new evidence that firms appear to manage long-run earnings upward in order to manage employee perceptions of employment security. In particular, we exploit exogenous state-level changes in unemployment insurance benefits and test for unwinding of prior upward earnings management when benefits increase. An increase in unemployment benefits makes unemployment relatively less costly and reduces employees’ unemployment risk, thereby reducing firms’ upward earnings management incentives. Consistent with the hypothesis, we find a significant reduction in abnormal accruals, increased recognition of special items and writedowns, and greater downward restatement likelihood, following an increase in state-level unemployment benefits. Cross-sectional tests suggest greater unwinding of prior upward earnings management for firms with higher labor intensity, higher layoff propensity and a higher percentage of low-wage workers. Collectively the results provide new evidence of the impact of rank and file employees on firms’ financial reporting choices.

Suggested Citation

Dou, Yiwei and Khan, Mozaffar and Zou, Youli, Labor Unemployment Insurance and Earnings Management (August 11, 2014). Harvard Business School Accounting & Management Unit Working Paper No. 15-008, Available at SSRN: https://ssrn.com/abstract=2478701 or http://dx.doi.org/10.2139/ssrn.2478701

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)

Causeway Capital Management, LLC

Youli Zou

University of Connecticut ( email )

School of Business
Storrs, CT 06269-2041
United States

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