Title: The Employment Consequences of Earnings Smoothing: Evidence from Audit Firm Mergers in China

Authors: Charles Hsu (The Hong Kong University of Science and Technology), Zhiqian Jiang (Xiamen University), Chaopeng Wu (Xiamen University), Zehao Yan (Nanchang University)

Abstract: We investigate the employment consequences of corporate earnings smoothing. Using audit firm consolidation as an exogenous shock impacting earnings smoothing, we find that firm-level earnings smoothing has a positive effect on employment growth. The effect is concentrated in firms with lower perceived job security, such as privately owned enterprises and firms with higher operational risk, consistent with earnings smoothing influencing employees’ perceptions of job security and, consequently, their career decisions. Further analyses show that the effects of earnings smoothing on employment growth and employee job security are diminished when achieved through employee welfare reductions. We also document a crowding-out effect in the local labor market, where a firm’s earnings smoothing negatively influences the employment growth of local peer firms.