Workplace Safety and Real Earnings Management

Abstract

Using work-related injury data from the Occupational Safety and Health Administration (OSHA), we document that firms with higher workers’ injuries and illnesses tend to manage earnings through real activities manipulation. Rather than the relative cost from switching one method to another, short-term performance pressure by transient institutional investors, who trade based on current earning news, explains our results. Further analyses show that if firms have a higher CEO risk incentive, managers of those firms are more likely to smooth their earnings by reporting inflated production and contracted discretionary expenses. Overall, our findings suggest that poor workplace safety leads to incentives for managers’ opportunistic financial reporting behavior.