Employee effort and earnings management

In this study, we examine the relationship between employee effort within the firm and earnings management, using data on working hours and discretionary accruals. With higher employee effort, we find less earnings management among U.S. firms. This result is stronger when earnings are more predictable and persists after we control for endogeneity. We also find smaller earnings discontinuities with higher employee effort. Our domestic results remain the same with a global sample. Our results suggest that earnings management enables benchmark beating with greater precision than can high employee effort alone, but also that high-effort firms may be misclassified as earnings manipulators.

Automated summary

In this study, we find a negative relationship between employee effort and earnings management, where higher employee effort results in less earnings management. Companies with higher employee effort have more predictable earnings and smaller earnings discontinuities. The study suggests that high-effort firms may be misclassified as earnings manipulators, as earnings management can enable benchmark beating with greater precision than high employee effort alone.