Financial Reporting Quality and Wage Differentials: Evidence from Worker-Level Data

64 Pages Posted: 17 Dec 2019 Last revised: 7 Sep 2021

See all articles by Jung Ho Choi

Jung Ho Choi

Stanford University Graduate School of Business

Brandon Gipper

Stanford University Graduate School of Business

Sara Malik

University of Utah - David Eccles School of Business

Date Written: August 18, 2021

Abstract

We examine whether financial reporting quality affects worker wages using employer-employee matched data in the U.S. We find that low financial reporting quality is associated with a compensating wage differential—i.e., a risk premium—even after controlling for worker characteristics. The data show a sizable wage differential using both firm-level reporting quality and workers switching to low financial reporting quality firms. We explore two potential channels of this association: the performance pay and turnover risk channels, where workers bear risks from noise in performance measurement and unemployment, respectively. We find that the association is stronger when industries use more performance pay for rank-and-file employees and that firms with low reporting quality exhibit high employee turnover. To mitigate endogeneity concerns over omitted firm characteristics, we show that—after the accounting scandals in 2002 and after the announcements of an internal control weakness (ICW)—former Andersen clients and ICW firms pay wage premiums to employees, with magnitudes between 0.9% to 2.8% of annual wages. Overall, we demonstrate economically significant compensating wage differentials for low financial reporting quality firms.

Keywords: Financial Reporting Quality, Wage Differentials, Performance Pay, Investment Inefficiently, Turnover

JEL Classification: D83, J31, J63, M41, M51, M52

Suggested Citation

Choi, Jung Ho and Gipper, Brandon and Malik, Sara, Financial Reporting Quality and Wage Differentials: Evidence from Worker-Level Data (August 18, 2021). Available at SSRN: https://ssrn.com/abstract=3496103 or http://dx.doi.org/10.2139/ssrn.3496103

Jung Ho Choi (Contact Author)

Stanford University Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
(650)721-8434 (Phone)

Brandon Gipper

Stanford University Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
(650)498-4350 (Phone)

Sara Malik

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

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