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Unemployment governance, labour cost and earnings management: Evidence from China

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  • Hamid Beladi
  • Chen Cheng
  • May Hu
  • Yuan Yuan

Abstract

This study investigates the effect of labour cost on earnings management based on the panel data of listed firms in China. We use the average wage of employees in firm level as the proxy for labour cost. Firms with rising labour cost become more likely to engage in negative earnings management to conceal profits or report losses. The effect becomes more significant in state‐owned enterprises, labour‐intensive enterprises, firms in high unemployment‐rate regions and firms with political connections. Further research finds that, under the institutional background of Chinese unemployment governance, firms get more government subsidies and tax preferences and reduce the excessive employment through negative earnings management. To a certain extent, this weakens the policy effect of unemployment governance. Overall, our conclusions are meaningful to the reform of unemployment governance, the standardisation of earnings management behaviour, the improvement of the government subsidy policies and the improvement of the efficiency of public resource allocation.

Suggested Citation

  • Hamid Beladi & Chen Cheng & May Hu & Yuan Yuan, 2020. "Unemployment governance, labour cost and earnings management: Evidence from China," The World Economy, Wiley Blackwell, vol. 43(10), pages 2526-2548, October.
    • Handle: RePEc:bla:worlde:v:43:y:2020:i:10:p:2526-2548
    DOI: 10.1111/twec.12923
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