AAA Spark Meeting of Regions

Managers’ Rank & File Employee Coordination Costs and Real Activities Manipulation

• In Event: Executive Compensation

Abstract

We predict that managers’ rank & file employee coordination costs constrain managers’ real activity-based earnings management (RAM). We test this prediction using 99 state adoptions of wrongful dismissal laws (WDLs) between 1967 and 2004 that trigger exogenous increases in rank & file employment protections. WDLs increase managers’ rank & file employee coordination costs because WDL-related employment protections weaken an important employee coercion tool that otherwise facilitates managers’ coordination of employees’ real activities: managers’ threat of arbitrary dismissal. We find that RAM – but not more centralized accrual-based earnings management – declines when managers’ rank & file employee coordination costs increase. Additional analyses reveal that the effect of WDLs on RAM varies predictably in event-time and across expenditure accounts, states, firms and WDL types.

Authors

• David Godsell, University of Illinois at Urbana-Champaign

• Kelly Huang, Florida International University

• Brent Lao, Illinois State University