Essays on Labor Issues in Accounting

Abstract

This dissertation consists of two parts. In the first part, I document the economywide extent of corporate violations related to non-financial stakeholders such as employees, environment, and customers and the associated incentives provided in executive bonus plans. Using firm-level data on corporate violations from 47 federal agencies, I find that the number of violations per year is lower in firms with bonus plans that place less emphasis on expenses, a practice referred to as “cost-shielding”, compared to those with cost-cutting bonus plans. The relation between costshielding incentives and corporate violations is more pronounced for firms with weaker corporate governance, firms that operate in competitive industries, and firms with less monopsony power. In additional tests, I confirm my findings using more detailed data from the U.S. Department of Labor’s Wage and Hour Division and document that the number of employment-related violations decreases after managers receive an employee-related goal in their bonus plans for the first time. These findings highlight a novel link between incentives that stem from compensation plans and corporate compliance practices –an indicator of the risks borne by firms to non-financial stakeholders. In the second part, I examine the effect of the change in employee incentives on the extent of accounting restatements using the adoption of Employee Stock Ownership Plans (ESOPs) as an exogenous shock. ESOPs provide employees with long-term ownership in the firm by investing the firm’s stock in employees’ retirement accounts. I find evidence of an increased probability of restating financial statements after the adoption of ESOPs. Overall, this study contributes to our understanding of the forces that affect accounting restatements.