Do Employees Prefer Conservative Accounting?

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