Reputation Building or Skin in the Game: Employee Welfare’s Impact on Financial Reporting Quality

Abstract

Based on the 8271 firm-year observations from 2010 to 2016, this paper investigates the impact of employee welfare on the financial reporting quality. Financial reporting quality is measured by the degree of abnormal accruals and real activities manipulation. Due to the availability of data, the sample’s year interval could not be extended to 2020, which is the same limitation shared by previous literature. The results show that employee welfare attracts attention and enhances supervision by establishing a good reputation. The enhancement of supervision ultimately improves the financial reporting quality. Further analysis shows that the positive impact of employee welfare on financial reporting quality is weakened in companies with high ownership concentration or excessive ESOP costs, suggesting that whether employee welfare can play a positive role depends on the corporate governance environment.