Labor Unemployment Concern and Corporate Discretionary Disclosure

• In Event: Financial Accounting and Reporting 1

Abstract

We investigate whether management withholds bad news when workers’ assessment of their unemployment risk is high. Using changes in state unemployment insurance laws as exogenous variations of labor unemployment risk, we show that higher unemployment benefits result in more bad news forecasts. This relation is stronger when firms are financially constrained, when CEO and CFO have higher equity incentives, and when workers are likely to be affected more by unemployment. Our findings are robust to a battery of tests for alternative explanations, such as reverse causality, unobserved local shocks and measurement errors. Finally, we find a similar effect of unemployment concerns on disclosure using negative financial words (negative tone) appearing in 10-K and 10-Q filings as an alternative proxy for bad news disclosure. Overall, our findings suggest that labor unemployment concern is an important consideration for corporate discretionary disclosure.

Authors

• Yuan Ji, George Washington University

• Liang Tan, The George Washington University