Strategic accounting choice around firm level labour negotiations

Abstract

We study accounting choice around firm-level collective agreement negotiations. Prior literature argues that managers make income-decreasing accounting choices to limit the concessions made to trade unions. However, empirical research to date fails to find evidence in support of this hypothesis. We expect that this lack of evidence is driven by the confounding effects of (i) methodological concerns and (ii) influential institutional factors. Using a sample of US firms that engage in firm-level labor bargaining during the period 1994-2007, we study whether managers act strategically in an attempt to reduce the proportion of firm wealth that is accrued to employees. Our findings suggest that managers take real rather than accounting actions to minimize payments. In particular, we find evidence consistent with (i) managerial strategic timing of the negotiation, and with (ii) increased conditional conservatism in the year of labor bargaining. We do not find evidence of earnings manipulation. This potentially signals that accounting choice around labor negotiations is informative rather than opportunistic. Keywords: accounting choice, earnings quality, collective bargaining.