Do Managers Withhold Good News from Labor Unions?

Abstract

With scarce empirical support, prior literature argues that managers tend to withhold good news and promote bad news to preserve their bargaining power against labor unions. This paper provides empirical evidence of this rarely supported argument. Using comprehensive firm-level data from South Korea, where labor unions have a long tradition of making credible threats, we find that overall disclosure frequency is negatively related to labor union strength, and that this relation is more pronounced in firms with good news. We also find that firms with strong labor unions withhold good news during the labor negotiation period and release it in a gradual fashion afterward and that this pattern is more prominent than that of firms with weak or no unions, implying that managers time news disclosures according to bargaining schedules to achieve better outcomes in labor negotiations. These results are robust to various sensitivity tests. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.2075 . This paper was accepted by Mary Barth, accounting.

The Role of Labor Unions in Corporate Transparency: Focusing on the Role of Governance in Auditor Change Process

“…By reducing auditor tenure, unions can secure the independence of the auditor, which results in a higher-quality audit. These results provide alternative and more convincing evidence and an additional explanation of the findings of previous research (Chung et al [26]; Cheng et al [35]) that companies with labor unions are generally audited by high-quality auditors. We expect that the results provide useful implications for investors to predict audit quality for firms with a labor union.…”

“…The extant literature documents that labor unions want to receive more reliable information to function effectively, but managers are reluctant to provide such information transparently in order to gain an upper hand in wage negotiations and to limit the release of discretionary information (Hilary [16]; Chung et al [35]). Hilary [16] finds that information asymmetry proxied as the bid-ask spread, probability of informed trading, trading volume and analyst coverage are positively related to organized labor.…”

“…Labor unions try to capture increased profits as much as they can through collective bargaining, and practical evidence shows that the wages determined in collective bargaining are increased as the accounting earnings of the company increase (Blanchflower et al [50]). As a result of this rent-seeking behavior of labor unions, managers of a firm with organized unions tend to report lower profits or conceal their resources and accurate financial information (DeAngelo and DeAngelo [51]; Mora and Sabater [52]; Hilary [16]; Chung et al [35]). On the other hand, as informed unions have an advantageous position in wage negotiations (Kleiner and Bouillon [13]), they need high-quality financial information (Leung et al [14], Appelbaum and Hunter [15]).…”

Is Labor Related to the Duality of Earnings Smoothing?

“…As mentioned before, labor could affect income smoothing. For example, when labor unions are present, managers are motivated to conceal information [51], increase leverage to gain bargaining advantages [20], hold smaller cash reserves [21], and decrease firms' operating flexibility [22]. In contrast, due to employees' job-security concerns, companies are conservative on financial policies [27] and pay higher wages to their employees when facing high leverage [28].…”

Wealth Destruction Effects of Annual Management Forecasts

“…Further, because IDD reduces the bargaining power of key employees, it lowers the likelihood that they will use earnings projections as negotiation leverage to extract rents. Firms have a greater incentive to provide earnings forecasts when the proprietary cost in the form of employee rent extraction threat declines (Verrecchia 1983;Kleiner and Bouillon 1988;Hilary 2006;Chung et al 2015;Bova, Dou, and Hope 2015). Revealing information about future performance reduces managers' option value of manipulating information to gain an advantage in the wage-bargaining process.…”