Earnings management and the likelihood of whistleblowing can be the channels through which EW impacts crash risk. The relation is stronger for labor intensive firms and industries, in more effects of internet stock trading for dummies 2018 labor markets, and in less competitive product markets.

It is more pronounced in poorly governed firms and in countries with poorinvestors’ protection and lower disclosure requirements. We examine whether employee welfare practices are associated with future stock price crash risk. According to the stakeholder hypothesis, if strong commitment to employee well-being genuinely aims at strengthening the firm’s reputation in the market, enhancing the shareholders’ engagement, avoiding costly strikes, and boosting the employees’ productivity, higher level of employee welfare would be expected to mitigate stock crash risks. On the contrary, the agency theory predicts that, if managers attempt to use generous employee welfare plans to reduce the likelihood that the employees blow the whistle on the management wrongdoings, better employee welfare would likely be associated with higher crash risk. We find robust evidence supporting the agency theory thesis: high levels of employee welfare standards contribute to stock price crash risk.

Moreover, earnings management and the likelihood of whistleblowing appear to be the channels through which employee welfare impacts stock price crash risk. Our evidence further shows that the positive relation between employee welfare and crash risk is stronger for labor intensive firms and industries, in more regulated labor markets, and in less competitive product markets. Furthermore, this positive relationship is more pronounced in poorly governed firms and in countries with poor investors’ protection and lower disclosure requirements. We are grateful to Kee-Hong Bae and Narjess Boubakri for constructive comments on the early drafts of this paper. We also thank the editor, anonymous referees, and participants at the 2016 Northern Finance Association Conference in Mont-Tremblant, Quebec Canada, the 2016 ACFAS seminar held at University of Quebec in Montreal, the 2016 Summer Accounting and Finance Conference in Tunisia and the 2017 Southern Finance Association in Key West, Florida, USA for their helpful comments. Latest environmental news, features and updates.

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