Employee Firing Costs and Accounting Conservatism: Evidence From Wrongful Discharge Laws

47 Pages Posted: 26 Nov 2018 Last revised: 24 Nov 2019

See all articles by Huasheng Gao

Huasheng Gao

Fanhai International School of Finance, Fudan University

Jun Huang

Shanghai University of Finance and Economics

Date Written: November 20, 2019

Abstract

This paper identifies the causal effect of a firm’s employee firing costs on its accounting conservatism, using the staggered adoption of U.S. state wrongful discharge laws that increase a firm’s cost of firing employees. We find a significant increase in accounting conservatism for firms headquartered in states that pass such laws relative to firms headquartered elsewhere. This effect is stronger for firms that are more labor-intensive, for firms that have higher propensity to fire employees, for firms that make more firm-specific investment, and for firms that face greater operation uncertainty. Overall, our findings indicate that higher firing costs result in more conservative accounting decisions by firms.

Keywords: firing costs, accounting conservatism, wrongful discharge laws, employee protection

JEL Classification: M41, G30, J63

Suggested Citation

Gao, Huasheng and Huang, Jun, Employee Firing Costs and Accounting Conservatism: Evidence From Wrongful Discharge Laws (November 20, 2019). Available at SSRN: https://ssrn.com/abstract=3276474 or http://dx.doi.org/10.2139/ssrn.3276474

Huasheng Gao

Fanhai International School of Finance, Fudan University ( email )

Beijing West District Baiyun Load 10th
Shanghai, 100045
China
2165642222 (Phone)
2165642222 (Fax)

Jun Huang (Contact Author)

Shanghai University of Finance and Economics ( email )

No. 777 Guoding Road, Shanghai
Shanghai, 200433
China

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