Evidence of income-decreasing earnings management before labour negotiations within the firm
- Mora Enguídanos, Araceli
- Sabater Marcos, Ana M.
ISSN: 0210-1521
Year of publication: 2008
Volume: 32
Issue: 2
Pages: 201-230
Type: Article
More publications in: Investigaciones económicas
Abstract
The "political costs" hypothesis predicts that labour bargaining creates incentives to reduce accounting earnings in order to avoid salary demands. Previous studies in countries with a "close shop system", such as the U.S. and Canada, have obtained mixed results. We argue that the political costs hypothesis is better suited to the "open shop system" of Continental European countries. Using a sample of Spanish companies, Jones (1991) model and its extensions are used to analyse total and discretionary accruals around the time of labour negotiations. The evidence that we obtain is consistent with the hypothesis that managers depress earnings prior to negotiations.