Labor Unions and Income Smoothing

• In Event: Eclectic Topics

Abstract

While accounting literature suggests that managers have incentives to manage earnings to enhance their relationship with stakeholders, the vast majority of the focus has been on equity market participants. We examine one of other important stakeholders; labor unions. We predict that labor unions provide managers incentives to shelter firm resources and secure managers’ jobs from labor unions, and thereby strengthen managerial incentives for income smoothing. Using a large sample of U.S. firms over 1983-2006, we find that income smoothing activity is positively associated with the strength of labor unions. We also find that for firms with stronger labor unions, managers tend to adjust R&D investments to a larger extent as a way of smoothing. We further test the prediction in the international setting and confirm the positive association between the union strength and income smoothing.

Authors

• Sophia JW Hamm, The Ohio State University

• Boo Chun Jung, University of Hawaii at Manoa

• Woo-Jong Lee, The Hong kong Polytechnic University