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

58 Pages Posted: 17 Dec 2019

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

Stanford University Graduate School of Business

Date Written: November 30, 2019

Abstract

We examine whether financial reporting quality influences employee turnover and wages using employer-employee matched data in the U.S. We find that low financial reporting quality is associated with high employee turnover risk, so workers demand wage premiums to bear this risk. High corporate governance firms exhibit a weaker association between financial reporting quality and turnover rates, suggesting that corporate governance mitigates turnover risk related to low financial reporting quality. We further find that more educated and higher paid workers receive higher wage premiums associated with low financial reporting quality although turnover rates are similar across these different groups of workers, consistent with sophisticated workers identifying financial reporting quality. Using Sarbanes-Oxley mandated reports of internal control weaknesses as a research setting, we show that as a firm’s internal control system weakens, firms pay wage premiums to employees. Overall, these analyses indicate that low financial reporting quality firms compensate for higher turnover risk by paying higher wages to workers, which increases firms’ cost of labor.

Keywords: Financial Reporting Quality, Wage, Turnover

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

Suggested Citation

Choi, Jung Ho and Gipper, Brandon and Malik, Sara, Financial Reporting Quality, Turnover Risk, and Wage Differentials: Evidence from Worker-Level Data (November 30, 2019). 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

Stanford University Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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