Employee welfare and earnings management

Qifan Zhai and Lin Xu

International Review of Financial Analysis, 2025, vol. 102, issue C

Abstract: This study examines the association between employee welfare and corporate earnings management. Existing literature suggests that firms with better employee welfare are more productive and hence have less incentive to engage in accrual earnings management. At odds with this incentive view, this paper finds that firms with high welfare levels actually substitute accrual earnings management with real earnings management based on a sample of China A-share listed firms. Beyond the scope of incentives, this research proposes that employee welfare also proxies for operating flexibility, which facilitates managers’ ability to use real earnings management relative to accrual earnings management. Consistent with this agency theory-based view, further evidence demonstrates that the positive (negative) relation between employee welfare and real (accrual) earnings management is more pronounced for firms faced with lower ability of real-activity manipulation and higher likelihood of employee whistleblowing. The mediation model results consistently confirm operating flexibility as the channel through which employee welfare affects earnings management strategy. Besides, the impact of employee welfare on earnings management increases with CEO power and managerial horizon, but can be curbed by high-quality corporate governance. Lastly, the relationship between employee welfare and earnings management demonstrates a counter-cyclical nature, strengthening the argument of agency theory.

Keywords: Accrual earnings management; Real earnings management; Employee welfare; Fringe benefits; Operating flexibility; Whistleblowing (search for similar items in EconPapers)
JEL-codes: G30 J28 M14 M41 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1057521925001632
Full text for ScienceDirect subscribers only

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:eee:finana:v:102:y:2025:i:c:s1057521925001632

DOI: 10.1016/j.irfa.2025.104076

Access Statistics for this article

International Review of Financial Analysis is currently edited by B.M. Lucey

More articles in International Review of Financial Analysis from Elsevier
Bibliographic data for series maintained by Catherine Liu ().