Managers’ rank & file employee coordination costs and real activities manipulation

David Godsell, Kelly Huang, Brent Lao

Research output: Contribution to journalArticlepeer-review

Abstract

We investigate the effect of managers' rank & file employee coordination costs on real activities manipulation (RAM). We identify exogenous variation in managers' rank & file employee coordination costs using the adoption of 99 wrongful dismissal laws across 47 U.S. states between 1970 and 1999. We first find that RAM declines when managers' rank & file employee coordination costs increase. We further document that managers’ rank & file employee coordination costs reduce decentralized RAM but affect neither centralized RAM nor centralized accrual-based earnings management, both of which are less likely to require rank & file employee coordination. Event-time tests corroborate and document the validity of the parallel trends assumption in our setting. Cross-sectional tests document predictable variation in our main result across firms and over time. Consistent with rank & file employee coordination costs constraining RAM, managers miss earnings thresholds more often after rank & file employee coordination costs increase. Our nuanced inferences inform the literature investigating factors that constrain RAM and the extent to which rank & file employees determine firm outcomes.

Original languageEnglish (US)
Article number101426
JournalAccounting, Organizations and Society
Volume107
DOIs
StatePublished - May 2023
Externally publishedYes

Keywords

  • Coordination costs
  • Earnings management
  • Rank & file employees
  • Real activities

ASJC Scopus subject areas

  • Accounting
  • Sociology and Political Science
  • Organizational Behavior and Human Resource Management
  • Information Systems and Management

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