09 Financial Accounting 4: Accounting issues related to labor, politics, and environments (FAR4)
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ItemAre Firms’ Disclosed Diversity Targets Credible?( 2022)Amid growing pressures to comply with ESG standards, firms increasingly disclose their ESG targets. However, given the difficulty in verifiability, it is unclear whether this public commitment to ESG goals is credible or only cheap talk. In this paper, we answer the question of how stakeholders should interpret firms’ disclosure of ESG goals and what they could expect in terms of firms’ future ESG performance. Specifically, we examine whether firms that publicly disclose diversity targets truly increase their diversity levels after the target disclosure. Exploiting a novel dataset of detailed firm employee records, we find that firms that disclosed a diversity target have indeed improved their diversity, but the diversity level already increased substantially prior to the target disclosure. To further explore how certain target characteristics are associated with disclosure credibility, we hand collected and coded firms’ diversity goals from their sustainability reports. We show that numerical, forward-looking, and all-employee targeted goals are more credible than others. We also find that firms that are historically more compliant, with greater institutional pressure, and with greater innovation demand tend to disclose more credible goals, suggesting the importance of examining firms’ incentives rather than the act of disclosure itself. Overall, our results generate practical implications for two groups: investors adjusting their decisions based on ESG disclosure and regulators assessing the necessity and content of ESG disclosure regulations.
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ItemInstitutional Blockholder Exit Threats and Corporate Social (Ir)responsibility( 2022)Institutional blockholders, who have incentives to gather private information and sell their shares when managers underperform, exert governance through exit threats. Hence, managers align their actions with shareholders’ interests to dissuade blockholders from selling. We find that as exit threats increase, firms reduce not only social irresponsibility (CSI), but also social responsibility (CSR), implying that CSI and CSR are independent actions that both reflect agency problems rather than firm value enhancement. Furthermore, consistent with exit theory, the negative impact of exit threats on CSI and CSR increase as managerial wealth is sensitive to stock price, the firm is cash-rich (more susceptible to “bad” agency problems), and following Schedule 13G filings that indicate blockholders’ intent to remain passive (exert governance through exit threats only). We contribute to research on corporate social (ir)responsibility and the role of blockholders in disciplining both CSR and CSI that may not be in the shareholders’ interests.
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ItemThe Impact of Financial Reporting Mandates on Labor Unions( 2022)Labor unions in the United States are subject to financial reporting mandates, requiring them to disclose detailed financial information annually. This paper studies the effects of the reporting mandate on unions' representation elections and union charges. Exploiting a regulatory threshold that determines the amount of information publicly disclosed by unions, we document that unions just above the threshold, who are required to disclose more information, file fewer election petitions, are less likely to win elections, and receive fewer votes during those elections than unions just below the threshold. These effects are the strongest when employers hire labor relations consultants during elections. Additionally, we find that unions above the threshold have significantly fewer charges and grievances filed against them. This result is primarily driven by a decrease in non-meritorious charges. Collectively, our results suggest that mandated financial reporting imposes a substantial proprietary cost on unions during representation activities.
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ItemHype or Hope? Selection and Performance of Accountable Care Organizations( 2022)The performance of pay-for-performance (P4P) models in healthcare has been mixed. While prior studies have explored various population-based payment models, there is a lack of empirical evidence related to selection of high risk, high-reward payment models in the context of value-based healthcare. Further, the performance implications of selection into new types of payment models is not well understood. We study the rollout of Accountable Care Organizations (ACO) under the Medicare Shared Savings Program (MSSP) and identify factors that explain their selection into two-sided risk models, which offer greater rewards as well as penalties. Specifically, we study whether such ACO selection decisions are associated with performance improvements based on their shared cost savings as well as quality of health outcomes. Our longitudinal analysis is based on publicly available Medicare ACO data for the six-year period between 2013 and 2018, and explores the antecedents and consequences of ACO selection into two-sided risk models. We find that ACOs with greater organizational scope, based on their scale, service variety and patient segments, are also more likely to switch to a two-sided risk model. Further, we observe that ACOs that switched into two-sided models exhibit greater savings and marginally higher quality, compared to ACOs that remained in a one-sided risk model. However, our analysis indicates that the initial gains after switching are not sustained over time, as these ACOs exhibit significant reduction in the rate of improvement of shared savings and quality, in the three-year period after switching. Our results indicate that ACOs with superior prior capabilities reap the advantages associated with MSSP incentives, and imply that incentive programs that promote short-term goals help participants who enjoyed greater a priori advantages in terms of their extant resources and capabilities. However, long-term sustainable performance improvements remain an elusive goal, and our research suggests that the incentives in the current ACO program need to be modified to reward improvements in their operational capabilities.
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ItemSharing the Pain between Workers and Management: Evidence from the COVID-19 Pandemic and 9/11 Attacks( 2022)We examine the rhetoric in ESG literature that managers “share the pain” of employees who are laid off or whose benefits are cut by committing to reduce CEO pay or by enacting other positive worker friendly actions during the Covid crisis. Using the exogenous shock of the COVID pandemic and a unique database, we examine more than 4,062 positive and negative actions targeted at workers taken by the S&P 1500 firms in 2020 in response to the pandemic. Our findings indicate that economic considerations such as exposure to the pandemic and poor stock performance prior to the pandemic are the primary determinants of management’s decision to share the pain of employees. Stakeholder concerns, proxied by higher employee-related corporate social responsibility scores, lower pay disparity between the CEO and the median employee, or a signatory to the Business Roundtable Statement, are not associated with managers’ sharing of the pain. Evidence of such pain sharing from another unexpected crisis from the past –the September 11, 2001, terrorist attacks – is remarkably similar. Sharing the pain is not associated with future stock returns performance. Finally, we show that the median CEO’s wealth increased nearly 18-fold relative to the CEO pay cut for firms that enforced CEO pay cuts and laid off employees during the Covid crisis. The paper adds to growing evidence that U.S. firms do not appear to “walk the talk” of concerns for stakeholders.
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ItemLabor Costs of Implementing New Accounting Standards( 2022)While much research focuses on the informational benefits of new accounting standards, the costs of implementing new standards remain unclear. We examine the adoption of two new major standards: lease accounting and revenue recognition. We find increase in the number of accounting job postings, related to those standards, in standards’ issuance years. Firms most affected by new standards, measured by accounting complexity and early adoption behavior, post higher number of accounting jobs. We estimate incremental labor costs at about 30 percent of median audit fees for each standard for the most affected firms. These costs, as a percentage of their total employee cost, are higher for smaller firms, indicating greater regulatory-compliance burden. We provide large-sample evidence on the direct labor costs, and thus on the lower bound of implementation costs associated with new accounting standards. Our findings should interest standard setters as they evaluate cost-benefit tradeoffs before issuing new standards.
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ItemESG Attention in Capital Markets: Evidence from China’s Carbon Neutrality Pledge Announcement( 2022)We study investors’ demand for climate-related corporate information and its stock market implications. Using China’s interactive investor platforms, where investors can directly submit questions to firms, we document a significant increase in interest in carbon-related information following the government’s announcement of a commitment to carbon neutrality. The increase in information demand is reflected in questions regarding carbon-related technology, the company’s plans to reduce carbon emissions, and the performance impact of the government’s climate policies. Stock market reactions are more favorable for firms receiving high carbon interest. Analysts also give more bullish EPS forecasts to firms receiving increased climate-related attention, suggesting that investors expect the government’s ESG policies to create growth opportunities. In the long term, we observe an increase in idiosyncratic risk for these firms, consistent with increased uncertainty associated with the energy transition. This uncertainty is not accompanied by higher stock returns, on average.
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ItemCorporate Labor Misconduct and Government Contract Termination for Convenience( 2022)A prominent feature of government contracting is that the federal government has a unilateral right to terminate the contract for convenience as long as the termination is in “the Government’s interest.” We provide the first large sample evidence on government contract termination for convenience and examine whether it can be triggered by contractors’ labor misconduct. We find that when contractors were penalized for serious labor misconduct in the previous year, their government contracts are more likely to be terminated for convenience. The effect is stronger when the misconduct is more severe or recurring, when the contractor receives higher media attention, and when competition for government contracts is more intensive in the industry. In contrast, we find no evidence that contractors’ non-labor misconduct, including environmental and financial misconduct (e.g., accounting fraud), is associated with contract termination for convenience.
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ItemSubstitution between CSR Activities: Evidence from Hiring and Mistreating Unauthorized Workers and Pollution( 2022)We argue substitution exists among CSR investments and exogenously increasing one CSR investment could lead to a decrease in another CSR investment. We provide evidence using the U.S. states’ staggered adoptions of E-Verify mandates, which curtails a labor-related social bad by reducing the hiring of unauthorized workers and related workplace abuses. We find the mandate leads to an increase in plant-level pollution, an environmental social bad, and the effect is stronger when the mandate applies to more employers, for plants in states with more unauthorized workers in the labor force, and for plants with jobs that are inherently more hazardous.
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ItemToo Many Managers: Strategic Use of Titles to Avoid Overtime Payments( 2022)We exploit a federal law that affords firms the ability to avoid paying overtime wages when an employee is classified as a manager and paid a salary above a pre-defined dollar threshold. We show that listings for salaried managerial positions exhibit an 89% increase around the regulatory threshold, including the listing of managerial positions such as “directors of first-impression,” “lead reservationists,” and “coffee cart managers.” Overtime avoidance is more pronounced when firms have stronger bargaining power and employees have weaker rights. Moreover, it is more pronounced for firms with financial constraints, and when there are weaker labor outside options in the region. We find stronger results for occupations in industries that are penalized more often for overtime violations. Our results suggest broad usage of overtime avoidance using job titles across locations and over time, persisting through the present day.