The effect of real earnings smoothing on corporate labour investment

Abstract

This study investigates the impact of real earnings smoothing on labour investment efficiency. Our results show that real earnings smoothing is significantly associated with higher labour investment efficiency, supporting the private information signalling view of earnings smoothing. We also fine information asymmetry as a plausible channel through which real earnings smoothing improves labour investment efficiency. Further analyses find that the positive impact of real earnings smoothing on labour investment efficiency is primarily driven by the informational component rather than the garbling component of earnings smoothness, and is more pronounced for financially constrained firms with equity-based financing incentives and loss-making firms. Our paper advances the understanding of corporate labour investment and the benefits of real earnings smoothing.