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The Sheep Watching the Shepherd: Employee Representation on the Board and Earnings Quality

The European accounting review, 2022-10, Vol.31 (5), p.1299-1336 [Peer Reviewed Journal]

2021 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group 2021 ;ISSN: 0963-8180 ;EISSN: 1468-4497 ;DOI: 10.1080/09638180.2021.1919169

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  • Title:
    The Sheep Watching the Shepherd: Employee Representation on the Board and Earnings Quality
  • Author: Overland, Conny ; Samani, Niuosha
  • Subjects: Accruals quality ; Boards of directors ; Employee representatives ; Real earnings management
  • Is Part Of: The European accounting review, 2022-10, Vol.31 (5), p.1299-1336
  • Description: We investigate to what degree employee representatives contribute to the board's monitoring of earnings quality. We argue that employee representatives have incentives to prevent earnings manipulations motivated by negotiation considerations. Furthermore, they seek risk reducing policies, have a long-term interest in their firm and possess firm-specific knowledge, which in turn can result in improved earnings quality. Employee representation also increases the diversity on the board, which can enhance the board of directors' internal communication and monitoring. Using a sample of firms listed on the Stockholm Stock Exchange (2006-2014), we find lower abnormal accruals as well as less excessive R&D cuts in firms with employee representation, controlling for alternative model specifications and potential sample selection bias. Moreover, we find less income-decreasing abnormal accruals in firms with employee representatives during the 2010-2011 collective bargaining period. This study also reveals that earnings quality varies with the characteristics of employee representatives. Our findings contribute to the literature on boards' monitoring and financial reporting quality, as it examines a less noticed aspect of board diversity, i.e. employee representation.
  • Publisher: Routledge
  • Language: English
  • Identifier: ISSN: 0963-8180
    EISSN: 1468-4497
    DOI: 10.1080/09638180.2021.1919169
  • Source: Taylor & Francis Open Access
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