Accounting Disclosures and Employee Wages

Abstract

We examine the relation between a firm’s accounting disclosures and the wages paid to its employees. Using establishment-level Census data, we document that firms with greater information risk arising from poorer disclosures, measured by less readable annual reports and the absence of management earnings forecasts, pay their employees more. This relation is stronger when employees own more stock in their firm, bear greater information acquisition costs, and have more influence in the wage-setting process. We also utilize instrumental variables and exploit the passage of Section 404 of the Sarbanes-Oxley Act as a shock to the public information available about a firm’s financial reporting environment and find evidence suggesting a causal effect of disclosures on wages. Overall, these results are consistent with the theory of compensating wage differentials, as employees appear to receive higher wages for bearing additional information risk associated with working for a firm with poorer disclosures.

Keywords: Disclosures, Employee Wages, Readability, Management Forecasts

JEL Classification: M40, M41, J31