The Effects of Labour on Accounting Choice in Canada

Abstract

This study examines the effects of labour considerations on accounting choice in Canada. Two potential labour‐related incentives are considered: ability to pay and employee attraction and retention. Measures of these incentives are developed based on Canadian data: unionization for ability‐to‐pay incentives, and labour intensity and the percentage of white‐collar employees for the attract and retain incentives. Our results indicate that ability‐to‐pay incentives, measured by unionization, are not associated with depreciation policies in Canada. In contrast, the findings provide mixed support for the attract‐and‐retain perspective, because labour intensity was significantly correlated with these choices, while the percentage of white‐collar employees was marginally significant.

Strategic Accounting Choice Around Firm-Level Labor Negotiations

“…In a slightly different setting, later studies, such as Scott (1994) or Cullinan and Knobett (1994) also find only weak evidence of an association between labor union intensity and accounting strategies. The more recent study of Cullinan and Bline (2003) fails to find evidence of an association between labor considerations and the choice of depreciation policies in Canada. Cullinan and Bline (2003) argue that the general lack of evidence in this line of research is due to labor negotiations being infrequent, and thus, other common incentives for incomeincreasing manipulation overriding the income-decreasing motives.…”

“…The more recent study of Cullinan and Bline (2003) fails to find evidence of an association between labor considerations and the choice of depreciation policies in Canada. Cullinan and Bline (2003) argue that the general lack of evidence in this line of research is due to labor negotiations being infrequent, and thus, other common incentives for incomeincreasing manipulation overriding the income-decreasing motives. In line with this argument, extant literature demonstrates that managers face income-increasing incentives derived from compensation and debt contracts, or to meet simple accounting targets, such as beating analysts' forecasts or prior period earnings (Burgstahler andDichev 1997, Degeorge et al 1999).…”

“…With regards to the alternative 'attract-and-retain' hypothesis, it is argued that in certain settings managers choose income-maximizing accounting policies to reassure their employees of firm financial strength (Bowen et al 1995, Cullinan andBline 2003). This hypothesis clearly applies to settings where it is possible to differentiate amongst classes of workers, as well as in settings (industries or firms) characterized by the presence of highly qualified, difficult to replace workers.…”

Do Managers Withhold Good News from Labor Unions?

“…Such managers tend to hold less cash ), cut dividends (DeAngelo and DeAngelo 1991), manage earnings downward (DeAngelo and DeAngelo 1991), miss analysts' forecasts (Bova 2013), and strategically choose accounting methods (Bowen et al 1995, Cullinan and Bline 2003, D'Souza et al 2000 to project a negative picture and, as a result, better cope with labor's wage demands. In a similar vein, earlier research argues that such managers are reluctant to share information on firms' prospects with labor so as to preserve bargaining power (Kleiner and Bouillon 1988, Leap 1991, Hilary 2006.…”

Do Managers Withhold Good News from Labor Unions?

“…Managers facing organized labor often take strategic actions to lower a firm's perceived ability to meet a wage demand. Such managers tend to hold less cash (Klasa, Maxwell, and Ortiz-Molina, 2009), cut dividends (DeAngelo and DeAngelo, 1991), manage earnings downward (DeAngelo and DeAngelo, 1991), miss analysts' forecasts (Bova, 2012), and strategically choose accounting methods (Bowen, Ducharme, and Shores, 1995;Cullinan and Bline, 2003;D'Souza, Jacob, and Ramesh, 2000) to project a negative picture and, as a result, better cope with labor's wage demands. In a similar vein, earlier research argues that such managers are reluctant to share information on firms' prospects with labor so as to preserve bargaining power (Kleiner and Bouillon, 1988;Leap, 1991;Hilary, 2006).…”