The Impact of Non-Financial Stakeholders on Accounting Conservatism: The Case of Labor Unions'
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This study examines the relation between labor union strength and conditional accounting conservatism. We argue that labor unions can have an increasing or decreasing effect on conditional conservatism due to considerations associated with layoffs and job security of union members. Using Basu’s (1997) asymmetric timeliness framework and multiple measures of union strength, we find that labor union strength leads to less conditional conservatism, even after controlling for known determinants of conditional conservatism. Our results are robust to endogeneity tests as well as a battery of other sensitivity tests. We further demonstrate that the negative relation likely results from unions’ ability to reduce the likelihood of layoffs. Overall, we provide fresh evidence about the impact of a key nonfinancial stakeholder, namely labor unions, on an important property of earnings.
Abstract
This study examines the relation between labor union strength and conditional accounting conservatism. We argue that labor unions can have an increasing or decreasing effect on conditional conservatism due to considerations associated with layoffs and job security of union members. Using Basu’s (1997) asymmetric timeliness framework and multiple measures of union strength, we find that labor union strength leads to less conditional conservatism, even after controlling for known determinants of conditional conservatism. Our results are robust to endogeneity tests as well as a battery of other sensitivity tests. We further demonstrate that the negative relation likely results from unions’ ability to reduce the likelihood of layoffs. Overall, we provide fresh evidence about the impact of a key nonfinancial stakeholder, namely labor unions, on an important property of earnings.
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