Abstract
This study examines the relation between labor union strength and conditional accounting conservatism. Prior research suggests that strong labor unions restrict management from substituting high risk investments for low risk investments. Conceptually, conditional accounting conservatism also serves to restrict this type of asset substitution. Thus, union strength and conservatism might act as substitutes. However, it is plausible that labor unions induce greater information asymmetry, which increases shareholder demand for conservatism, and that managers seeking a bargaining advantage with unions have incentives to supply conservatism. This implies a complementary relation between union strength and conservatism. To determine which of these relations hold, we use Basu’s (1997) asymmetric timeliness framework. We find that stronger unions are associated with lower levels of conservatism, even after controlling for abnormal bid-ask spread, size, book-to-market ratio, leverage, and litigation risk. Results are also robust to a battery of sensitivity tests, including controlling for endogeneity, alternative measurement horizons, CEO ownership, and unconditional conservatism. Overall, we provide evidence about the impact of a key stakeholder, namely labor unions, on an important property of earnings.
Published Version
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call