Interplay between stakeholder relationship, accounting choices and labor investment
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.