Do Employees Prefer Conservative Accounting?

47 Pages Posted: 14 Nov 2021 Last revised: 17 Nov 2021

See all articles by Chen Lin

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Thomas Schmid

The University of Hong Kong - Faculty of Business and Economics

Huai Zhang

Nanyang Business School, Nanyang Technological University

Date Written: November 13, 2021

Abstract

We hypothesize that employees prefer conservative accounting. We test our hypothesis, using the setting of the German law on codetermination. The law mandates half of the board seats to be filled by employee representatives if the firm’s number of domestic employees (DE) exceeds the threshold of 2,000. We exploit the discontinuity around the threshold and document a substantial increase in accounting conservatism, when employees gain meaningful influence on accounting policies through their representation on the board. Additionally, we show that the impact of employee board representation on accounting conservatism concentrates in firms with high risks and firms with high information asymmetry. Our findings have implications for academics, managers, and politicians.

Keywords: Employee representation, accounting conservatism

JEL Classification: M41, J01

Suggested Citation

Lin, Chen and Schmid, Thomas and Zhang, Huai, Do Employees Prefer Conservative Accounting? (November 13, 2021). Available at SSRN: https://ssrn.com/abstract=3962616 or http://dx.doi.org/10.2139/ssrn.3962616

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Thomas Schmid

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Huai Zhang (Contact Author)

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore
+65-6790-4097 (Phone)

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