Labor and Finance: The Role of Financial Reporting Quality
56 Pages Posted: 4 Nov 2019
Date Written: October 24, 2019
We examine the role of high quality financial reporting in facilitating corporate employment. We focus on firms with maturing long-term debt, which creates refinancing risk. While refinancing risk is associated with reductions in net hiring, we find that higher quality financial reporting mitigates this effect. This result is stronger when labor market frictions are more significant (e.g., for firms with high labor intensity or unionized labor), and when information and agency problems are otherwise more severe (e.g., for firms with higher likelihoods of default or more heterogeneous debt structures). We also document that higher quality financial reporting improves firms’ abilities to obtain debt in the face of refinancing risk and reduces the cost of debt among those that obtain it. We show that our results extend beyond firm-level refinancing risk to more general changes in the economy-wide supply of credit. Finally, we supplement our main analyses with a quasi-natural experiment using the implementation of SFAS 131. Overall, our evidence suggests a specific financing channel through which financial reporting quality facilitates corporate employment.
Keywords: financial reporting quality; labor; employment; hiring; refinancing; debt maturity
JEL Classification: G30; J01; M41
Suggested Citation: Suggested Citation