The labour contract law, profit shock and corporate short-term responses -based on the perspective of corporation earnings management

Abstract

ABSTRACTThis paper has employed a difference-in-differences method to examine the impact of the Labour Contract Law on firm’s profit, and to investigate companies on how to cope with it by using earning management. It finds that, (1) the Labour Contract Law has led to labour-intensive enterprises to use earnings management to cope with profit shock in the short term; (2) in the long run, earnings management effect gradually weakens, and reverses in the fifth year; (3) because they can use advanced technology to replace the expensive labour force, innovative enterprises have stronger ability to cope with the impact of the Labour Contract Law in the future and more significant motivation to conduct earnings management in the short term. Based on the context that the labour contract influences labour-intensive enterprises’ profit, the study shows the short-term effect of earnings management to cope with the impact and enriches the research on the Labour Contract Law and the micro-enterprise behaviours.