The Unintended Consequence of Employment Nondiscrimination Acts: Evidence from Earnings Management
67 Pages Posted: 17 Jan 2024
Date Written: January 4, 2024
Abstract
Employment equality, an essential constituent of corporate social responsibility, has an important impact on corporate performance and decision-making. We find that U.S. state-level employment nondiscrimination acts (ENDAs), which outlaw discrimination based on sexual orientation and gender identity, lead to more accrual-based earnings management. We hypothesize that ENDAs may adversely affect firms’ operating performance, thus putting pressures on management to engage in earnings manipulation. Consistent with our conjecture, we find evidence that the staggered passage of ENDAs indeed has a negative effect on firms’ revenue and increases firms’ operating costs. We also show evidence that most of the accrual-based earnings management activities are intended to maintain current performance and avoid missing earnings thresholds. Finally, we show that the effect of ENDAs on earnings management is more pronounced for firms headquartered in conservative states and states with a higher percentage of homosexual population.
Keywords: Employment nondiscrimination acts; Earnings management; Corporate social responsibility
JEL Classification: J30; M41; K38
Suggested Citation: Suggested Citation