Employee firing costs and accounting conservatism: Evidence from wrongful discharge laws

Huasheng Gao, Jun Huang and Tianshu Zhang

Journal of Business Finance & Accounting, 2023, vol. 50, issue 9-10, 1612-1632

Abstract: This paper identifies the causal effect of a firm's employee firing costs on its conditional conservatism, using the staggered adoption of US state wrongful discharge laws (WDLs) that increase a firm's cost of firing employees. We find that the adoption of WDLs leads to a significant increase in conditional conservatism. This result is greater for firms that are more labor‐intensive, have higher propensities to fire employees, make more firm‐specific investments and have greater risk. Overall, our findings support the view that higher firing costs lead to greater demand for conditional conservatism to decrease investment inefficiencies because higher firing costs make inefficient investments (including overinvestment in negative‐net present value (NPV) projects and delays in disinvesting poorly performing projects) costlier for the firm.

Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1111/jbfa.12672

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:jbfnac:v:50:y:2023:i:9-10:p:1612-1632

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0306-686X

Access Statistics for this article

Journal of Business Finance & Accounting is currently edited by P. F. Pope, A. W. Stark and M. Walker

More articles in Journal of Business Finance & Accounting from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().