Abstract
I examine the relation between firms’ financial conduct and wage theft. Wage theft represents the single largest form of theft committed in the United States and primarily affects firms’ most vulnerable employees. I show that wage theft is more prevalent (i) when firms just meet or beat earnings targets and (ii) when executives’ personal liability for wage theft decreases. Wage theft precedes financial misconduct while the theft is undetected, but once firms are caught engaging in wage theft they are more likely to shift to engaging in financial misconduct. My findings highlight an economically meaningful yet previously undocumented way in which firms’ financial incentives relate to employee treatment.
Highlights
In response to financial pressures, firms frequently engage in real activities management (Dechow et al 2010) or outright misconduct (Chu et al 2019)
Lawsuit data come from the Stanford Securities Class Action Clearinghouse (SSCAC); I follow Karpoff et al (2017) and exclude lawsuits that do not pertain to financial reporting or violations of Securities and Exchange Commission (SEC) Rule 10(b)-5.17 I construct the dependent variable using both year t and year t + 1 to avoid potential measurement issues arising from uncertainty over whether wage theft occurs earlier in the year than financial misconduct
The coefficient on W ageT hef tit is negative, and statistically significant in all but column (3).23. These results suggest that while wage theft is undetected, firms have less incentive to engage in financial misconduct; once firms have been caught engaging in wage theft, they shift toward engaging in financial misconduct
Summary
In response to financial pressures, firms frequently engage in real activities management (Dechow et al 2010) or outright misconduct (Chu et al 2019). Prior studies document a substitute relation between real activities management and accruals management (e.g., Roychowdhury 2006; Zang 2012). I examine an economically meaningful but previously unexplored form of real activities management: corporate wage theft. I ask two main questions: (i) does wage theft arise from similar financial incentives to existing real activities management measures and, if so, (ii) are firms less likely to engage in financial misconduct when they engage in higher levels of wage theft?
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