Employee Turnover Likelihood and Earnings Management: Evidence from the Inevitable Disclosure Doctrine

64 Pages Posted: 2 May 2018 Last revised: 27 Sep 2018

See all articles by Huasheng Gao

Huasheng Gao

Fanhai International School of Finance, Fudan University

Huai Zhang

Nanyang Technological University (NTU)

Jin Zhang

Monash University

Date Written: August 27, 2018

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.

Keywords: Earnings Management, Employee Turnover Likelihood, Inevitable Disclosure Doctrine

JEL Classification: M41, J01

Suggested Citation

Gao, Huasheng and Zhang, Huai and Zhang, Jin, Employee Turnover Likelihood and Earnings Management: Evidence from the Inevitable Disclosure Doctrine (August 27, 2018). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3162874 or http://dx.doi.org/10.2139/ssrn.3162874

Huasheng Gao (Contact Author)

Fanhai International School of Finance, Fudan University ( email )

Beijing West District Baiyun Load 10th
Shanghai, 100045
China
2165642222 (Phone)
2165642222 (Fax)

Huai Zhang

Nanyang Technological University (NTU) ( email )

Nanyang Business School
50 Nanyang Ave.
Singapore, 639798
Singapore
+65-6790-4097 (Phone)

Jin Zhang

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

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