The effect of unionization on firms’ earnings management and employee compensation: Evidence from a regression discontinuity design

Abstract

This study examines the effect of unionization on US firms’ accruals‐based earnings management and future employee compensation expenses by employing a research design that overcomes the inherent endogeneity issue of the relationship between unionization and earnings management. First, by comparing firms that just pass unionization by a small number of votes to those that just barely lose elections, the regression discontinuity design estimations document significant downward accruals earnings management for firms that barely pass unionization, compared to those that barely fail to pass unionization. Second, the association between unionization and earnings management is only significant in US states without right‐to‐work legislation, where unions are more powerful. These findings are consistent with recently unionized firms’ incentives to report lower earnings in order to mitigate unions’ demands for greater employee compensation. Further, for firms that barely pass unionization, we find that: (1) unions cannot fully “undo” the effects of earnings management, that is, downward managed earnings depress future compensation expenses, and (2) firms cannot fully “undo” the effects of unionization, that is, compensation expenses increase after unionization despite the downward earnings management.

Unionization and employee welfare: a theoretical investigation using earnings management

“…Empirical studies find results consistent with our prediction from Proposition 1 (e.g. Lin, 2020;Brown et al, 2022).…”

“…The empirical literature documents mixed evidence on the association between unionization and future compensation expenses (e.g. see Blanchflower et al, 1996;Knepper, 2020;Lin, 2020;Frandsen, 2021;Brown et al, 2022). Our analytical model can disentangle the countervailing effects of unionization to increase workers' welfare and downward earnings management following unionization to decrease workers' welfare to show that unionization has a net positive impact on workers' welfare.…”

“…While Bova's (2013) results are consistent with the idea of earnings management at unionized firms, our theoretical model is able to tease out the interplay in managers' incentives to show more directly that managers of unionized firms manage earnings downward. Second, although there is some limited evidence on the effects of unionization on earnings management (DeAngelo and DeAngelo, 1991;Mora and Sabater, 2008;Lin, 2020;Brown et al, 2022), our model offers new Employee unionization cross-sectional predictions that have not been tested in the prior literature. Specifically, we show that newly unionized firms are more likely to engage in income-decreasing earnings management when earnings are more highly correlated, the cost of earnings management is lower and earnings are more volatile.…”

A Endogeneidade e a Importˆancia dos Quase-Experimentos para a Inferˆencia Causal nas Pesquisas em Contabilidade

“…Para ilustrar o uso da técnica de RD na pesquisa em Contabilidade, tomemos o estudo realizado por Lin et al (2022), que estimam o impacto da sindicalização (unionization) no gerenciamento de resultados no contexto norte-americano. A motivação do trabalho está relacionada à possibilidade de que funcionários de empresas sindicalizadas demandem salários mais altos quando as empresas têm bons resultados financeiros.…”

Appointment-Based CEO Connectedness and Employee Compensation: Empirical Evidence from China

“…The existing literature has documented a battery of factors that affect employee compensation. These factors include employee ability, unionization [7,8] and firm characteristics such as firm size [9], firm age [10,11], ownership structure [12], the presence of FDI [13], capital structure [14] and so on. The most relevant study investigates how CEO formal power affects employee compensation, demonstrating that CEOs with absolute formal power based on voting rights pay their employees more [15].…”