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

Huasheng Gao, Huai Zhang, Jin Zhang

Research output: Contribution to journalArticleResearchpeer-review

6 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)1424-1470
Number of pages47
JournalReview of Accounting Studies
Volume23
Issue number4
DOIs
Publication statusPublished - Dec 2018

Keywords

  • Earnings management
  • Employee turnover likelihood
  • Inevitable disclosure doctrine

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