Labor unions, pay disparity and financial statement comparability

Purpose - This study examines how the presence of labor unions affects a firm’s pay disparity between executives and employees and its financial statement comparability. Design/methodology/approach - It uses firm-level labor union data in Korea and applies regression analyses to a sample of 1,776 firm-year observations from 2004 to 2008. Findings - The authors find that unionized firms have a smaller pay disparity between executives and employees than non-unionized firms, suggesting that labor unions place pressure on the pay structure. Unionization also lowers financial statement comparability, which helps managers of unionized firms maintain information asymmetry. Further, this negative relationship between unionization and financial statement comparability is stronger in non-chaebol firms, implying that they are more motivated than chaebol firms to reduce their financial statement comparability in response to the presence of labor unions. In addition, the negative relationship between unionization and financial statement comparability is pronounced in profit-making firms, firms with less analyst following, firms with fewer foreign investors and firms in more competitive product markets. Research limitations/implications - The finding that firms adjust comparability in response to labor unions interests regulators and policymakers, who emphasize the role of comparability in providing usefulness to information users. Originality/value - The findings add to the existing literature on the effect of labor unions on firms' pay structures and accounting choices.