Top

Review of Accounting Studies

Published in:

01-10-2018

Employee turnover likelihood and earnings management: evidence from the inevitable disclosure doctrine

Authors: Huasheng Gao, Huai Zhang, Jin Zhang

Published in: Review of Accounting Studies | Issue 4/2018

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

We present evidence that managers consider employee turnover likelihood in their accounting choices. Our tests exploit U.S. state courts’ staggered recognition of the inevitable disclosure doctrine (IDD), which reduces employees’ ability to switch employers. We find a significant decrease in upward earnings management for firms headquartered in states that recognize the IDD, relative to firms headquartered elsewhere. The effect of the IDD is stronger for firms relying more on human capital and for firms whose employees have higher ex-ante turnover likelihood, confirming the employee retention channel. Overall, our results support the view that retaining employees is an important motive for corporate earnings management.

previous article Costs and benefits of internal control audits: evidence from M&A transactions

next article Competition and voluntary disclosure: evidence from deregulation in the banking industry

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Available only for authorised users

For example, firms may increase their investment in laboratory equipment.

An extensive literature shows that firms usually locate their core business activities and R&D facilities close to their headquarters (e.g., Howells 1990; Pirinsky and Wang 2006; Breschi 2008). Therefore it is reasonable to assume that a significant part of the firm’s key employees, who know its trade secrets, work in the firm’s headquarters state.

IPUMS database categorizes occupations into seven groups: 1) management, professional, and related occupations; 2) service occupations; 3) sales and office occupations; 4) farming, fishing, and forestry occupations; 5) construction, extraction, and maintenance occupations; 6) production, transportation, and material mobbing occupations; and 7) military-specific occupations.

Aboody, D., & Lev, B. (2000). Information asymmetry, R&D, and insider gains. Journal of Finance, 55(6), 2747–2766.CrossRef

Ali, A., & Zhang, W. (2015). CEO tenure and earnings management. Journal of Accounting and Economics, 59(1), 60–79.CrossRef

Ali, A., Li, N., & Zhang, W. (2015). Restrictions on managers’ outside employment opportunities and asymmetric disclosure of bad versus good news. https://doi.org/10.2139/ssrn.2674412.

Ashbaugh-Skaife, H., Collins, D. W., Kinney Jr., W. R., & LaFond, R. (2008). The effect of SOX internal control deficiencies and their remediation on accrual quality. The Accounting Review, 83(1), 217–250.CrossRef

Badertscher, B. A., Collins, D. W., & Lys, T. Z. (2012). Discretionary accounting choices and the predictive ability of accruals with respect to future cash flows. Journal of Accounting and Economics, 53(1–2), 330–352.CrossRef

Balsam, S., & Miharjo, S. (2007). The effect of equity compensation on voluntary executive turnover. Journal of Accounting and Economics, 43(1), 95–119.CrossRef

Barton, J., & Simko, P. J. (2002). The balance sheet as an earnings management constraint. The Accounting Review, 77(Supplement), 1–27.CrossRef

Beck, P. J., & Narayanamoorthy, G. S. (2013). Did the SEC impact banks’ loan loss reserve policies and their informativeness? Journal of Accounting and Economics, 56(2–3), 42–65.CrossRef

Bertrand, M., & Mullainathan, S. (2003). Enjoying the quiet life? Corporate governance and managerial preferences. Journal of Political Economy, 111(5), 1043–1075.CrossRef

Bird, R. C., & Jain, S. C. (2008). The global challenge of intellectual property rights. Northampton, MA: Edward Elgar Publishing.

Bowen, R. M., DuCharme, L., & Shores, D. (1995). Stakeholders’ implicit claims and accounting method choice. Journal of Accounting and Economics, 20(3), 255–295.CrossRef

Breschi, S. (2008). Innovation-specific agglomeration economies and the spatial clustering of innovative firms. In C. Karlsson (Ed.), Handbook of research on innovation and clusters (pp. 167–192). Cheltenham: Edward Elgar Publishing.

Burgstahler, D., & Dichev, I. (1997). Earnings management to avoid earnings decreases and losses. Journal of Accounting and Economics, 24(1), 99–126.CrossRef

Carter, M. E., Lynch, L. J., & Tuna, I. (2007). The role of accounting in the design of CEO equity compensation. The Accounting Review, 82(2), 327–357.CrossRef

Chang, X., Fu, K., Low, A., & Zhang, W. (2015). Non-executive employee stock options and corporate innovation. Journal of Financial Economics, 115(1), 168–188.CrossRef

Chava, S., & Roberts, M. R. (2008). How does financing impact investment? The role of debt covenants. Journal of Finance, 63(5), 2085–2121.CrossRef

Chen, X., Cheng, Q., & Wang, X. (2015). Does increased board independence reduce earnings management? Evidence from recent regulatory reforms. Review of Accounting Studies, 20(2), 899–933.CrossRef

Chen, D., Gao, H., & Ma, Y. (2018). Human capital driven acquisition: Evidence from the Inevitable Disclosure Doctrine. Working paper, Fudan University, and University of International Business and Economics. https://doi.org/10.2139/ssrn.2713600.

Cheng, Q., & Warfield, T. D. (2005). Equity incentives and earnings management. The Accounting Review, 80(2), 441–476.CrossRef

Choudhary, P., Rajgopal, S., & Venkatachalam, M. (2009). Accelerated vesting of employee stock options in anticipation of FAS 123-R. Journal of Accounting Research, 47(1), 105–146.CrossRef

Clogg, C. C., Petkova, E., & Haritou, A. (1995). Statistical methods for comparing regression coefficients between models. American Journal of Sociology, 100(5), 1261–1293.CrossRef

Cohen, D. A., Dey, A., & Lys, T. Z. (2008). Real and accrual-based earnings management in the pre-and post-Sarbanes-Oxley periods. The Accounting Review, 83(3), 757–787.CrossRef

Cornell, B., & Shapiro, A. C. (1987). Corporate stakeholders and corporate finance. Financial Management, 16(1), 5–14.CrossRef

Dechow, P. M., & Dichev, I. D. (2002). The quality of accruals and earnings: the role of accrual estimation errors. The Accounting Review, 77(Supplement), 35–59.CrossRef

Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. The Accounting Review, 70(2), 193–225.

DeFond, M. L., & Jiambalvo, J. (1994). Debt covenant violation and manipulation of accruals. Journal of Accounting and Economics, 17(1–2), 145–176.CrossRef

Demerjian, P. R., & Owens, E. L. (2016). Measuring the probability of financial covenant violation in private debt contracts. Journal of Accounting and Economics, 61(2–3), 433–447.CrossRef

Deng, X., & Gao, H. (2013). Nonmonetary benefits, quality of life, and executive compensation. Journal of Financial and Quantitative Analysis, 48(1), 197–218.CrossRef

Dichev, I. D., & Skinner, D. J. (2002). Large-sample evidence on the debt covenant hypothesis. Journal of Accounting Research, 40(4), 1091–1123.CrossRef

Dorsey, S. (1995). Pension portability and labor market efficiency: a survey of the literature. Industrial & Labor Relations Review, 48(2), 276–292.CrossRef

Dou, Y., Khan, M., & Zou, Y. (2016). Labor unemployment insurance and earnings management. Journal of Accounting and Economics, 61(1), 166–184.CrossRef

DuCharme, L. L., Malatesta, P. H., & Sefcik, S. E. (2004). Earnings management, stock issues, and shareholder lawsuits. Journal of Financial Economics, 71(1), 27–49.CrossRef

Fang, V. W., Tian, X., & Tice, S. (2014). Does stock liquidity enhance or impede firm innovation? Journal of Finance, 69(5), 2085–2125.CrossRef

Flood, S., King, M., Ruggles, S., & Warren, J. R. (2015). Integrated Public Use Microdata Series, Current Population Survey: Version 4.0 [dataset]. https://doi.org/10.18128/D030.V4.0.

Francis, J. R. (2001). Discussion of empirical research on accounting choice. Journal of Accounting and Economics, 31(1–3), 309–319.CrossRef

Francis, J. R., & Krishnan, J. (1999). Accounting accruals and auditor reporting conservatism. Contemporary Accounting Research, 16(1), 135–165.CrossRef

Gao, H., & Zhang, W. (2017). Employment nondiscrimination acts and corporate innovation. Management Science, 63(9), 2982–2999.CrossRef

Gao, H., Luo, J., & Tang, T. (2015). Effects of managerial labor market on executive compensation: evidence from job-hopping. Journal of Accounting and Economics, 59(2–3), 203–220.CrossRef

Garmaise, M. J. (2011). Ties that truly bind: noncompetition agreements, executive compensation, and firm investment. Journal of Law, Economics, and Organization, 27(2), 376–425.CrossRef

Godfrey, E. R. (2004). Inevitable disclosure of trade secrets: employee mobility v. employer’s rights. Journal of High Technology Law, 3(1), 161–179.

Godfrey, J. M., & Hamilton, J. (2005). The impact of R&D intensity on demand for specialist auditor services. Contemporary Accounting Research, 22(1), 55–93.CrossRef

Graham, J. R., Harvey, C. R., & Rajgopal, S. (2005). The economic implications of corporate financial reporting. Journal of Accounting and Economics, 40(1–3), 3–73.CrossRef

Hall, B. H., Jaffe, A. B., & Trajtenberg, M. (2005). The NBER patent citation data file: Lessons, insights and methodological tools. In A. B. Jaffe & M. Trajtenberg (Eds.), Patents, citations and innovations: A window on the knowledge economy (pp. 403–470). Cambridge: MIT Press.

Harris, J. O. (2000). Doctrine of inevitable disclosure: a proposal to balance employer and employee interests. Washington University Law Review, 78(1), 325–345.

Healy, P. M. (1985). The effect of bonus schemes on accounting decisions. Journal of Accounting and Economics, 7(1–3), 85–107.CrossRef

Healy, P. M., & Palepu, K. G. (1993). The effect of firms' financial disclosure strategies on stock prices. Accounting Horizons, 7(1), 1–11.

Howells, J. (1990). The location and organization of research and development: new horizons. Research Policy, 19(2), 133–146.CrossRef

Hribar, P., & Collins, D. W. (2002). Errors in estimating accruals: implications for empirical research. Journal of Accounting Research, 40(1), 105–134.CrossRef

Imbens, G. W., & Wooldridge, J. M. (2009). Recent developments in the econometrics of program evaluation. Journal of Economic Literature, 47(1), 5–86.CrossRef

Ippolito, R. A. (1985). The labor contract and true economic pension liabilities. The American Economic Review, 75(5), 1031–1043.

Jones, J. J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(2), 193–228.CrossRef

Jorda, K. F. (2007). Trade secrets and trade-secret licensing. In A. Krattiger, R. T. Mahoney, L. Nelsen, J. A. Thomson, A. B. Bennett, K. Satyanarayana, et al. (Eds.), Intellectual property management in health and agricultural innovation: A handbook of best practices (pp. 1043–1057). Oxford: Centre for the Management of Intellectual Property in Health Research and Development and Davis: Public Intellectual Property Resource for Agriculture.

Khan, M., & Watts, R. L. (2009). Estimation and empirical properties of a firm-year measure of accounting conservatism. Journal of Accounting and Economics, 48(2–3), 132–150.CrossRef

Klasa, S., Ortiz-Molina, H., Serfling, M., & Srinivasan, S. (2018). Protection of trade secrets and capital structure decisions. Journal of Financial Economics, 128(2), 266–286.CrossRef

Kogan, L., Papanikolaou, D., Seru, A., & Stoffman, N. (2017). Technological innovation, resource allocation, and growth. The Quarterly Journal of Economics, 132(2), 665–712.CrossRef

Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39(1), 163–197.CrossRef

Ljungqvist, A., & Wilhelm Jr., W. J. (2003). IPO pricing in the dot-com bubble. Journal of Finance, 58(2), 723–752.CrossRef

Malsberger, B. M. (2004). Covenants not to compete: A state-by-state survey. Washington, DC: BNA Books.

Matsumoto, D. A. (2002). Management’s incentives to avoid negative earnings surprises. The Accounting Review, 77(3), 483–514.CrossRef

Palomeras, N., & Melero, E. (2010). Markets for inventors: learning-by-hiring as a driver of mobility. Management Science, 56(5), 881–895.CrossRef

Petersen, M. A. (2009). Estimating standard errors in finance panel data sets: comparing approaches. Review of Financial Studies, 22(1), 435–480.CrossRef

Pirinsky, C., & Wang, Q. (2006). Does corporate headquarters location matter for stock returns? Journal of Finance, 61(4), 1991–2015.CrossRef

Png, I., & Samila, S. (2015). Trade secrets law and mobility: Evidence from inevitable disclosure. Working paper, National University of Singapore, and University of Navarra. https://doi.org/10.2139/ssrn.1986775.

Poterba, J., Rauh, J., Venti, S., & Wise, D. (2007). Defined contribution plans, defined benefit plans, and the accumulation of retirement wealth. Journal of Public Economics, 91(10), 2062–2086.CrossRef

Roberts, M. R., & Whited, T. M. (2013). Endogeneity in empirical corporate finance. Handbook of the Economics of Finance, 2(A), 493–572.CrossRef

Seaman, C. B. (2015). The case against federalizing trade secrecy. Virginia Law Review, 101, 317–394.

Skinner, D. J., & Sloan, R. G. (2002). Earnings surprises, growth expectations, and stock returns or don't let an earnings torpedo sink your portfolio. Review of Accounting Studies, 7(2–3), 289–312.CrossRef

Sweeney, A. P. (1994). Debt-covenant violations and managers’ accounting responses. Journal of Accounting and Economics, 17(3), 281–308.CrossRef

Teoh, S. H., Welch, I., & Wong, T. J. (1998). Earnings management and the underperformance of seasoned equity offerings. Journal of Financial Economics, 50(1), 63–99.CrossRef

U.S. Chamber of Commerce. (2014). The case for enhanced protection of trade secrets in the trans-pacific partnership agreement. https://www.uschamber.com/sites/default/files/legacy/international/files/Final%20TPP%20Trade%20Secrets%208_0.pdf. Assessed 15 Sept 2018.

Watts, R. L., & Zimmerman, J. L. (1986). Positive accounting theory. Englewood Cliffs, NJ: Prentice-Hall.

Yu, F. (2008). Analyst coverage and earnings management. Journal of Financial Economics, 88(2), 245–271.CrossRef

Zechman, S. L. C. (2010). The relation between voluntary disclosure and financial reporting: Evidence from synthetic leases. Journal of Accounting Research, 48(3), 725–765.CrossRef

Title: Employee turnover likelihood and earnings management: evidence from the inevitable disclosure doctrine
Authors: Huasheng Gao
Huai Zhang
Jin Zhang
Publication date: 01-10-2018
Publisher: Springer US
Published in: Review of Accounting Studies / Issue 4/2018
Print ISSN: 1380-6653
Electronic ISSN: 1573-7136
DOI: https://doi.org/10.1007/s11142-018-9475-x

Springer Professional

Abstract

Please log in to get access to your license.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Other articles of this Issue 4/2018

Competition and voluntary disclosure: evidence from deregulation in the banking industry

Measuring the market response to going concern modifications: the importance of disclosure timing

Manager-analyst conversations in earnings conference calls

Costs and benefits of internal control audits: evidence from M&A transactions

SEC monitoring of foreign firms’ disclosures in the presence of foreign regulators

Does financial reporting above or below operating income matter to firms and investors? The case of investment income in China