The Sheep Watching the Shepherd: Employee Representation on the Board and Earnings Quality

Abstract

We investigate to what degree employee representatives contribute to the board's monitoring of earnings quality. We argue that employee representatives have incentives to prevent earnings manipulations motivated by negotiation considerations. Furthermore, they seek risk reducing policies, have a long-term interest in their firm and possess firm-specific knowledge, which in turn can result in improved earnings quality. Employee representation also increases the diversity on the board, which can enhance the board of directors' internal communication and monitoring. Using a sample of firms listed on the Stockholm Stock Exchange (2006-2014), we find lower abnormal accruals as well as less excessive R&D cuts in firms with employee representation, controlling for alternative model specifications and potential sample selection bias. Moreover, we find less income-decreasing abnormal accruals in firms with employee representatives during the 2010-2011 collective bargaining period. This study also reveals that earnings quality varies with the characteristics of employee representatives. Our findings contribute to the literature on boards' monitoring and financial reporting quality, as it examines a less noticed aspect of board diversity, i.e. employee representation.

Accounting for Corporate Human Rights: Literature Review and Future Insights

“…Instead, it is considered to take place in loose networks of social interactions between actors, which address mutual interests (Latour 1987). ANT may therefore be a useful tool for studying AHR networks, and can compensate for some of the drawbacks of legitimacy theory, which favours specific stakeholders (Parker 2005). It may provide insights into the process required to create knowledge and network dynamics and achieve common objectives (Chua 1995).…”

Supervision or Collusion? Common Institutional Ownership and Corporate R&D Manipulation

“…In other words, the problem of adverse selection arising from the advantage of information becomes an essential factor for some enterprises to defeat the original purpose of the government's innovation incentive policy. Some studies found an internal drive to manipulate R&D investment for tax incentive reduction and expectation adjustment (Overland & Samani, 2021;Liu, et al, 2021). Overall, it is essential to understand and explore the motivations for corporate R&D manipulation to help drive the implementation of "genuine innovation" towards a virtuous cycle.…”

The Role of Accountability in Workplace Democracy

“…Even though many companies reportedly consider employee involvement as a positive aspect of organisational development, implementation is usually problematic because of the lack of a meaningful agenda (“why we are involving employees?”) and underdeveloped means (“how we are doing so?”) (Overland & Samani, 2021; Rees et al, 2013). From an accountability perspective, workplace democracy begins by providing employees with instruments to control organisational conduct and hold managerial power to account (Battilana & Casciaro, 2021; Warren, 2014).…”

“…and underdeveloped means ("how we are doing so?") (Overland & Samani, 2021;Rees et al, 2013). From an accountability perspective, workplace democracy begins by providing employees with instruments to control organisational conduct and hold managerial power to account (Battilana & Casciaro, 2021;Warren, 2014).…”