Interplay between stakeholder relationship, accounting choices and labor investment

Abstract

This thesis examines the interplay between corporate social responsibility
 (CSR), financial reporting and corporate labor investment. In the first study, I examine
 the relationship between CSR and earnings quality in the context of changing
 regulatory regimes. For accrual-based earnings management, I find firms with higher
 CSR engagement are more likely to conduct aggressive accrual-based earnings
 management prior to the passage of Sarbanes Oxley Act of 2002 (SOX) whereas this
 aggressiveness of accrual-based earnings management has been significantly
 lowered by the passage of SOX. I further find the relationship between CSR and
 accrual-based earnings management is moderated by the manager-shareholder
 incentive alignment. Firms practicing CSR with low alignment are more likely to
 engage in accrual-based earnings management and therefore receive more
 constraining effect by regulatory scrutiny imposed by the passage of SOX. In terms
 of real earnings management, I consistently find that firms with higher CSR
 engagement are less likely to engage in costly real earnings management strategy in
 both pre- and post-SOX period. The results indicate that when facing the trade-off
 between accrual-based earnings management and real earnings management, firms
 with higher CSR engagement are more likely to engage in the earnings management
 that is less costly. Overall, the results suggest socially responsible firms present more
 transparent financial reporting practices in the post-SOX period.
 In the second study, I investigate the impact of employee treatment on labor
 investment efficiency and its implications for firm performance. Using a large sample
 of U.S. firms over the period of 1995 to 2015, I provide evidence that employee-friendly
 treatment is significantly associated with lower deviations of labor investment
 from the level justified by economic fundamentals, i.e., higher labor investment
 efficiency. I find employee-friendly treatment reduces both overinvestment and
 underinvestment, primarily via effective hiring. Moreover, labor investment efficiency
 is associated with improved labor productivity, return on assets and production
 efficiency, and employee-friendly policies contribute to both return on assets and
 production efficiency. Using the 2008-2009 financial crisis as an external shock and
 applying difference-in-difference method, I also show that employee-friendly firms
 have higher labor investment efficiency in the post-financial crisis period, but
 experience more inefficient labor investment during the crisis. The results are robust
 to placebo tests, alternative proxies for both employee treatment and labor investment
 efficiency, when I control for additional control variables, and when I address
 endogeneity issues.
 The third study investigates the impact of real earnings management and real
 earnings smoothing on corporate employment decisions. Using a large sample of U.S.
 firms from 1995 to 2016, I find that real earnings management is significantly
 associated with lower labor investment efficiency (i.e., higher deviations of labor
 investment from the level justified by economic fundamentals) whereas real earnings
 smoothing significantly improves labor investment efficiency. The findings are
 consistent with the notion that real earnings smoothing alleviates market frictions
 stemming from information asymmetry between managers and outside capital
 suppliers while real earnings management has the opposite effect. Consistently, I also
 find that the positive impact of real earnings smoothing on labor investment efficiency
 is mainly driven by the informational component rather than the garbling component
 of real earnings smoothing. In addition, I find that financially constrained firms with
 equity-based financing incentives are more likely to engage real earnings smoothing
 to lower the information asymmetry to obtain financing benefits whereas debt-focused
 constrained firms potentially adopt real earnings smoothing as an earnings
 manipulation tool. Overall, the sign reversal between real earnings management and
 real earnings smoothing for labor investment efficiency indicates distinctive
 implications of these two real earnings adjustments to capital market participants.
 These studies shed light on the understanding regarding the implications of
 stakeholder relationship for financial reporting practices and how stakeholder
 relationship, as well as financial reporting practices, can interact in the decision-making
 of corporate labor investment. The findings as to the relationship between
 CSR and financial reporting quality, the influence of employee-friendly policies and
 real earnings adjustments on labor investment efficiency contribute to the literature
 over the role of CSR and accounting information in capital market and also speak to
 the relevant literature on stakeholder relation, accounting quality, corporate
 governance and relevant legislation.