Abstract

This study examines the impact of labor union on the value-relevance of earnings. Agency problems caused by the separation of ownership and control is the central issue in an organization, and it calls for transparent and reliable accounting information on management. Large amount of literature also has been concerned with this issue, and finds that transparent and reliable accounting information is more informative in explaining the value of the firm. This literature has investigated a variety of determinants that affect the informativeness of earnings and has provided evidence that this informativeness of earnings varies with corporate governance, in addition to many other factors. Specifically, ownership structure, institutional features of the capital markets, and board structure have an impact on the informativeness of earnings proxied by the earnings±returns relationship, However, literature is limited in terms of the impact of employees who are significant stakeholders of the firm. Considering that accounting income tends to be viewed as a pie to be divided among stakeholders, employees may require transparent and reliable accounting information, especially accounting income. Thus, the purpose of this study is to enhance understanding of this corporate governance issue by examining the relationship between labor union and the value-relevance of earnings. Using 5,346 firm-year observations listed on the Korea Exchange(KRX), this study finds that unionized firms have a higher value-relevance of earnings compared to non-unionized firms. Second, a union’s bargaining power is positively related to the value-relevance of earnings. In sum, the above results imply that unions play a monitoring role and the value-relevance of earnings varies with the existence of a union or the bargaining power of union. This study adds on the exiting literature by improving understanding of a firm’s monitoring mechanism by regarding the firm’s accounting information. This study also has implications to practitioners and academics for labor negotiations by providing additional evidence on the role of labor union.

Keywords

• Labor union
• Agency costs
• Value-relevance of earnings
• Informativeness of earnings

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