Evidence of income-decreasing earnings management before labour negotiations within the firms

Abstract

"The "political costs" hypothesis predicts that labour bargaining creates incentives to reduce accounting earnings in order to avoid salary demands. Previous studies in countries with a "close shop system", such as the U.S. and Canada, have obtained mixed results. We argue that the political costs hypothesisis better suited to the "open shop system" of Continental Europeancountries. Using a sample of Spanish companies, Jones (1991) model andits extensions are used to analyse total and discretionary accruals around the time of labour negotiations. The evidence that we obtain is consistent with the hypothesis that managers depress earnings prior to negotiations."

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