Employee layoffs and earnings management

Abstract

This paper analyzes the accounting choices of firms in periods surrounding large work-force reductions (layoffs). Layoffs provide an incentive for managers to use accounting choices to manage earnings. Accrual analysis is performed on a sample of firms that announce large layoffs. Discretionary accruals are regressed on indicator variables for years associated with large layoffs. The results indicate that firms make accounting choices to reduce reported income in the years in which they announce large layoffs.