4.1 Introduction
Employees are critical for corporate success, and the value creation of a company is the result of the joint effects of employees and managers (Brown, 2000)，Therefore, protecting the interests of employees and improving the loyalty of employees are particularly important for corporate development and sustainability. Importantly, in addition to employees' demands for incentives, safety, sympathy and other benefits, employees have been putting forward requirements for the smooth operation of the company considering their working career (Liu, Wan, & Zhang, 2021). Accounting conservatism is beneficial to the smooth operation of the company (Iatridis, 2011), and it can improve the efficiency of employment contract realization (Watts, 2003), and reduce the possible agency problems (Lafond & Roychowdhury, 2008). I will investigate whether managers use accounting conservatism as a strategy to substitute conventional measures of employee wellbeing.
This study is motivated by the two theories to explain the possible relationship between accounting conservatism and employee wellbeing. One possible explanation is the stakeholder theory. The stakeholder theory holds that a stakeholder-oriented firm is likely to take the overall corporate strategy as a prerequisite or commitment mechanism to benefit its stakeholders (Guo et al., 2020). As companies strive to improve their relationships with stakeholders, the degree of conservatism in financial reporting should be increased because conservative reporting provides risk protection for
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stakeholders by reporting verifiable lower limits on the company's financial position (Guo et al., 2020).Accounting to Keim (1978), stakeholders-oriented companies show stronger commitments to stakeholders and conduct more responsible behaviour to fit stakeholders’ interests. Therefore, in addition to reducing the downside risks of stakeholders through the conservatism of financial reports, stakeholder-oriented managers may also undertake policies to enhance employees' wellbeing.
On the other hand,instead of taking every possible approach, managers may choose a more cost-efficient way to meet employees' needs at limited resources. According to the resource dependence theory, companies tend to choose the least-constraining device to govern the relations with stakeholders that will allow them to minimize uncertainty and maximize their autonomy (Pfeffer & Salancik, 2003). Although literature shows that employee wellbeing measures are beneficial to improving employees' sense of satisfaction, morale and motivation (Yang, Lin & Maresova, 2021; Wang, Dai, & Kong, 2021), according to Maslow's hierarchy of needs theory, satisfying employees' needs for career security may be a substitute in employee strategies compared with self- actualization needs (Jerome, 2013).
The literature shows that when employees’ perceived unemployment risk is high, firms bear substantial labor costs, including (a) new employees demanding higher wages and better working conditions, (b) more frequent turnover as existing employees seek more stable jobs, and (c) higher costs to attract potential job applicants (Brown & Matsa, 2016). This suggests that in order to reduce the cost of hiring and retaining employees
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in a competitive labour market, companies may have an incentive to signal financial soundness in financial reporting by managing the timing of recognition of good and bad news. Accounting conservatism ensures employees' interests by reducing employee concerns about the smooth running of the company by limiting of verifiability of earnings (D’Souza, Jacob & Ramesh, 2001). At the same time,accounting conservatism can facilitate managers to satisfy employees rather than employee well-being measures.
For example, it can improve the contractual efficiency of debtors and enable companies to reduce debt costs (Li, 2013), in addition, accounting conservatism reduces the risk of shareholders' lawsuits on managers by timely recognize losses (Chen, Li, & Xu, 2021), and reduces the exaggerations of net income or net assets in the book, thus reducing managers' worries about the need to improve employees’ reward due to the exaggerated book value (Shen, Liang, & Chen, 2013). Therefore, managers may choose accounting conservatism as a substitute employee strategy on employee wellbeing measures, considering the guarantee of employee career security and its broader role for managers.
I use the employee scores in Hexun CSR database to evaluate the employee wellbeing performance of the Chinese listed firms. In Table 2.2, the preliminary results show that accounting conservatism is negatively associated with employee wellbeing measures.
The variable description is presented in Appendix 2.1.1
1 The initial sample of this study includes all Chinese companies listed in A-share markets in the Shanghai and Shenzhen Stock Exchanges from 2010 to 2020. All financial data are collected from the China Listed Firms Research Database of China Stock Market and Accounting Research (CSMAR). Macroeconomic data is collected from China's National Bureau of Statistics. All continuous variables are winsorized at the top and bottom 1% to mitigate the concern of outliers. Table 2.1 presents the descriptive statistics for the main variables used in this
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This study aims at contributing to the literatures in the following perspectives. First, this paper expands the literature related to accounting conservatism as a governance mechanism and emphasizes the role of accounting conservatism in satisfying employees’ interests. Second, this study enriches the literature of managers' employee responsibility behaviour research. Existing literature generally focuses on the economic consequences of employee wellbeing (Chang et al., 2015; Guo, Huang, & Zhang, 2016), but its determinant factors is under-investigated. As such, this study links accounting information research with employee responsibility in social responsibility.
4.2 Future analysis of essay 2
1. The mechanism test. Based on hypothesis 2, analysing whether disposable cash flow is the influencing mechanism of the relationship between accounting conservatism and employee wellbeing.
2. Heterogeneity analysis, analysis of different company characteristics (profitability, labour-intensive of the industry), and different manager characteristics (government background, managerial ability) reshape the relations between accounting conservatism and employee wellbeing.
3. Endogeneity tests.
4. Other robustness checks.
study and the sample distribution by year. Appendix 2.2 shows the correlation matrix of key variables.
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5. Essay three: Research on the relationship between accounting conservatism and