Labor Unions and Management’s Incentive to Signal a Negative Outlook

Abstract

A long-standing earnings management hypothesis suggests that deflationary earnings management in a unionized setting should lead to concessions from the union during contract negotiations. However, little evidence exists to support this hypothesis. I assess the strategy of missing mean consensus analysts’ earnings estimates as an alternate means for managers to signal a negative outlook. I find that unionized firms are more likely to miss estimates than their non-unionized counterparts. Additionally, this propensity to miss estimates is increasing in both the firm’s percentage of unionized employees and multi-unionism, but is unaffected by the timing of the signal relative to contract renewal. Finally, this increased propensity to miss estimates appears to be driven by both differences in expectations management and earnings management across the two groups. Specifically, managers of unionized firms take less action than their non-unionized counterparts to guide forecasts downward when estimates are too high, and more action to deflate earnings when expectations are too low. Taken together, the findings suggest that managers do seek to project a negative outlook to their unions, and that this tendency is increasing in the union’s negotiation strength.