Employee Job Security and Financial Reporting Quality

We study the effect of employee job security on firms’ financial reporting quality. Job security enhances employee tenure and their vested interest in the firm, thereby strengthening their incentives to support high-quality financial reporting. Rank-and-file employees, who are directly involved in a firm’s daily operations, can influence financial reporting by identifying irregular transactions or reducing errors in the processes that generate inputs for accounting. Using a generalized difference-in-differences model around the staggered state adoptions of wrongful discharge laws (WDLs), we find that firms improve their financial reporting quality after the adoption of WDLs. This effect is greater for firms with higher relative labor costs, higher industry volatility, and lower unionization. Thus, our study offers novel insights into the causal effect of job security, a form of employee-related ESG policy, on financial reporting quality.