Unemployment insurance benefits and income smoothing |
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Authors: | Jeffrey Ng Tharindra Ranasinghe Guifeng Shi Holly Yang |
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Affiliation: | 1. The Hong Kong Polytechnic University, School of Accountancy and Finance, M741, 7/F Li Ka Shing Tower, Hung Hom, Kowloon, Hong Kong;2. University of Maryland, Robert H. Smith College of Business, 7699 Mowatt Lane – Van Munching Hall, College Park, MD 20742, USA;3. Shanghai Jiao Tong University, Antai College of Economics & Management, 1954 Huashan Road, Shanghai 200030, China;4. Singapore Management University, School of Accountancy, 60 Stamford Road, Level 4, Singapore 178900, Singapore |
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Abstract: | Labor unemployment insurance reduces unemployment concerns. We argue that these benefits moderate incentives to smooth earnings to reduce employees’ concerns about unemployment risk. Using exogenous variations in unemployment insurance benefits, we find evidence consistent with this argument. We also find that the link between unemployment insurance benefits and income smoothing is stronger when there is higher unemployment risk and when the firm is likely to employ more low-wage workers, who find unemployment insurance benefits especially useful. Our paper contributes to the literature by showing that public policy decisions such as unemployment insurance have significant, albeit probably unintended, externalities on corporate financial reporting. |
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Keywords: | Unemployment risk Unemployment insurance Compensating wage differentials Income smoothing M41 J65 J68 |
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