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The labour contract law, profit shock and corporate short-term responses -based on the perspective of corporation earnings management The labour contract law, profit shock and corporate short-term responses -based on the...
Jianqiang, Li; Yunlong, Ye; Yuxiao, Yu; Hongjian, Wang
2019-07-03 00:00:00
CHINA JOURNAL OF ACCOUNTING STUDIES 2019, VOL. 7, NO. 3, 364–384 https://doi.org/10.1080/21697213.2019.1701260 ARTICLE The labour contract law, profit shock and corporate short-term responses -based on the perspective of corporation earnings management a b a c Li Jianqiang , Ye Yunlong , Yu Yuxiao and Wang Hongjian a b School of Accountancy, Shanghai University of Finance and Economics, Shanghai, China; Ningbo Institute of Technology, Zhejiang University, Ningbo, China; School of Economics and Management, Nanchang University, Nanchang, China ABSTRACT KEYWORDS The Labour Contract Law; This paper has employed a difference-in-differences method to Labour Protection; Labour examine the impact of the Labour Contract Law on firm’s profit, Intensity; Corporation and to investigate companies on how to cope with it by using Earnings Management earning management. It finds that, (1) the Labour Contract Law has led to labour-intensive enterprises to use earnings manage- ment to cope with profit shock in the short term; (2) in the long run, earnings management effect gradually weakens, and reverses in the fifth year; (3) because they can use advanced technology to replace the expensive labour force, innovative enterprises have stronger ability to cope with the impact of the Labour Contract Law in the future and more significant motivation to conduct earn- ings management in the short term. Based on the context that the labour contract influences labour-intensive enterprises’ profit, the study shows the short-term effect of earnings management to cope with the impact and enriches the research on the Labour Contract Law and the micro-enterprise behaviours. 1. Introduction With the simultaneous development of the legal system and the harmonious society, it is increasingly important to standardise labour relations and to protect labourers. The Labour Contract Law, which came into effect on 1 January 2008, has protected the legitimate rights and interests of workers through legislation and has raised their incomes. Cheng, Smyth, and Guo (2015) and Cui, Ge, and Jing (2013) believe that the Labour Contract Law has significantly increased workers’ average wages and non-wage forms of remuneration. The Labour Contract Law has reduced the cost of right protection for employees and improved their consciousness to defend their rights. In case of the violation of employees’ interests, they tend to go on strike in protest, forcing firms to increase payment. Besides, the implementation of the Labour Contract Law makes work- ers better understand how to protect their legitimate rights and interests by signing labour contracts (Becker & Elfstrom, 2010; Li & Freeman, 2015), thus greatly increasing the CONTACT Ye Yunlong nbyyl@163.com Ningbo Institute of Technology, Zhejiang University, Ningbo, China Paper accepted by Kangtao Ye. © 2019 Accounting Society of China CHINA JOURNAL OF ACCOUNTING STUDIES 365 social security expenses paid by enterprises for workers (Gao, Yang, & Li, 2012). In a word, Labour Contract Law, as a highly biased law, leads to the rise of labour costs and the increase of firing costs. In the long run, the Labour Contract Law has a positive impact on enterprises. First, according to the labour efficiency view, the Labour Contract Law is essentially a labour protection policy, which improves the labour enthusiasm of employees (Xiaoran & Yujie, 2016; Yao, Xinzheng, & Luyao, 2017; Yuanyuan & Bin, 2014); Second, according to incomplete contract theory, the Labour Contract Law protects employees’ prior invest- ment and reduces the ‘rip-off’ behaviour of corporations, thus increasing employees’ investment in specific companies (Acharya, Baghai, & Subramanian, 2014). Third, accord- ing to the viewpoint of human capital, the Labour Contract Law makes the enterprise unable to terminate the labour contract at will, which increases the cohesion of employ- ees to the enterprise and makes them have an enhanced sense of belonging to the company. Therefore, employees will increase the human capital investment for the enterprise, thus improving the future earnings of the enterprise (Macleod & Nakavachara, 2007). However, in the short term, labour protection is more of disadvantages (Serfling, 2016). First, in addition to increasing payments to employees, the Labour Contract Law has more to do with raising the cost of firing workers. Prior to the implementation of the Labour Contract Law, the enterprise hires labour force according to the principle that labour productivity shall be no less than labour cost. After the implementation of Labour Contract Law, the decision-making constraint of enterprises becomes that labour productivity shall be no less than the sum of labour cost and firing cost, which leads to the decline of retained productivity of enterprises (Autor et al., 2007); Second, Labour Contract Law reduces the cost of trial-and-error of employees. Enterprise, in the past, could fire workers based on the damage they caused, but after the new law coming into effects, the deterrent ceases to exist, and some employees may engage in risky attempt, which brings to the enterprise loss. Trial-and-error cost reduction can also lead to risk-averse staff engaged in risky attempt, bringing risk to further increase; Third, labour protection increases the irrevocable nature of investment and reduces enterprise investment (Bai, Fairhurst, & Serfling, 2019; Calcagnini, Ferrando, & Giombini, 2014), Hongbo and Shilai (2017) find that the Labour Contract Law has brought ‘labour pains’ to enterprises, reducing the investment rate of enterprises, and has not been conducive to economic growth. At the same time, the labour protection law reduces the conversion option value and the contraction option value of projects (Bai, Fairhurst, & Serfling, 2019; Hopenhayn & Rogerson, 1993; Qinglu, Qingchuan, & Gang, 2015). Therefore, existing studies have found that labour protection has a negative impact on enterprises. The adverse impact of labour protection may provide an incentive for enterprises to conduct earnings management. Earnings management is a short-term behaviour. For those enterprises that can effectively deal with the impact of Labour Contract Law in the future, there is sufficient motivation to conduct earnings management in the short term. Acharya et al. (2014), Yuanyuan and Bin (2014) find that labour protection leads enter- prises to adopt advanced technology to replace expensive labour, thus overcoming the adverse impact of labour protection. These enterprises with the ability to substitute elements are often those with strong innovation ability. 366 L. JIANQIANG ET AL. Following the above analysis, in order to evaluate the impact of Labour Contract Law on enterprise earnings management, we conduct an empirical analysis of the implemen- tation of Labour Contract Law in 2008 as a quasi-natural experiment to construct adifference-to-differences strategy. The results show that: (1) the Labour Contract Law causes labour-intensive enterprises to conduct earnings management in a short time to cope with profit shock; (2) in the long run, earnings management gradually weakens and reverses in the fifth year; (3) since enterprises with strong innovation ability can use advanced technology to substitute expensive labour force, they have a stronger ability to deal with the impact of Labour Contract Law in the future, and their motivation for earnings management is more obvious in the short term; (4) further analysis shows that the Labour Contract Law has improved the earnings management level of non-state- owned enterprises, low-quality talents intensive enterprises and enterprises in areas with insufficient labour force, but has no significant impact on state-owned enterprises, high- quality talents intensive enterprises and enterprises in areas with abundant labour force. The conclusion of this paper is of great significance: (1) there is no literature to study the causal relationship between labour protection act and earnings management motiva- tion of enterprises, and this study supplements this part of literature. Labour protection has been a very important issue in labour economics. Most existing studies focus on analysing the impact of labour protection on investment and financing decisions of enterprises (Acharya et al., 2014; Xiaoran & Yujie, 2016; Yuanyuan & Bin, 2014). However, few literature have studied the relationship between labour protection and enterprise earnings management. (2) This paper analyses the motivation of enterprise earnings management from the perspective of long-term coping ability and short-term operating methods, indicating that earnings management is a short-term behaviour of enterprises, and enterprises with long-term ability to substitute elements are more likely to conduct earnings management in a short term. By analysing the element substitution ability of enterprises, this paper finds that enterprises with higher R&D investment will adopt advanced technology to replace expensive labour force, so as to carry out earnings management. (3) In terms of empirical method, trying to exclude the mixed interference of the international financial crisis in 2008, this paper provides some guidance for the future empirical research on the Labour Contract Law. The remainder of the paper is organised as follows: the second part is theoretical analysis and research hypothesis. The third part is data and methods. The fourth part is the analysis of empirical results. The fifth part is robustness test. The sixth part is the conclusion. 2. Theoretical analysis and research hypothesis 2.1. Labour contract law and earnings management The absorption of Labour Contract Law to its profits is indirect, uncertain and is a long- chain process. On the one hand, the Labour Contract Law makes it difficult for enterprises to dismiss workers and adjust the allocation of factors in accordance with economic laws. Enterprises without paying insurance and security funds before, as well as enterprises without signing labour contracts, need to re-enter into contracts, thus increasing the cost burden of enterprises (Becker & Elfstrom, 2010; Gao et al., 2012; Li & Freeman, 2015). On CHINA JOURNAL OF ACCOUNTING STUDIES 367 the other hand, element substitution does not necessarily increase corporate earnings. There is hardly risky to rely on cheap labour production in the past. After the implementa- tion of the Labour Contract Law, the management risk of the enterprise increases. If enterprises intend to use advanced technology to replace workers, they are required to have a healthy culture, strong capital to absorb new technology, and workers who are eligible to operate these new machines. Microeconomics tells us that workers operate the new machine is different from the original ones. They demand higher wages, resulting in further increases in labour costs. In either their own original technology or outsourcing technology, the management risk of the enterprise is greatly increased. The Labour Contract Law may encourage laziness. Highly skilled workers may have more spirit of contract. The new law does not directly change their behavioural patterns. But the Labour Contract Law mainly protects the interests of low-skilled workers. Their labour productivity is relatively low. After the new law coming into effect, companies cannot fire the low-skilled workers at will and have to pay various security expenses, which makes some they feel emboldened. Thus, it encourages the low-skilled workers’ laziness, leading to a decline, not an increase, in labour productivity. As long as the proportion of these workers is relatively high, the rise in labour costs will exceed the rise in labour productivity, eventually leading to a decline in corporate profits, and this process is most likely to be manifested in labour-intensive enterprises. Earnings management has been one of the hot topics in accounting and corporate finance, but few literature focus on the influence of legal system on earnings manage- ment of micro-enterprises. Modern company system requires enterprises to disclose information timely, accurately and comprehensively, but it is not always beneficial for enterprises. Enterprises are not isolated individuals in the capital market. In order to continue operations, maintain investor confidence and create a stable external operating environment, enterprises are often motivated to conduct earnings management through specific accruals or items such as product costs, expenses and cash, so as to avoid large fluctuations in corporate performance (Healy & Wahlen, 1999; Jian, Baiqiang, Feng, & Xiangqiang, 2016; Ma, Lai, & Zeng, 2014; Zhengfei, Jigao, & Bianxia, 2008). Earnings management is always a short-term behaviour. For enterprises having the ability to deal with profit shock in the future, earnings management is more likely to be carried out in a short term. Labour Contract Law is a comprehensive and permanent profit shock for all enter- prises, which leads to the rise of enterprise costs. In order to cope with the shock, enterprises tend to adopt advanced technology to replace expensive labour force, so as to finally realise technology replacement, structural adjustment and overcome the adverse impact of labour protection (Acharya et al., 2014; Xiaoran & Yujie, 2016; Yuanyuan & Bin, 2014). However, it is not possible for companies to replace expensive labour with advanced technology in a short time. Most investments are irrevocable to some extent, and some investment projects belong to sunk costs of enterprises (Abel & Eberly, 1996; Pindyck, 1991). Physical capital such as alternating arc furnaces, continuous castings and transfor- mers in steel plants can only be used in the steelmaking industry. Human capital such as contract workers, specific enterprise’s exclusive workers is of low liquidity (physical capital). It is difficult to fire workers during the contract period (human capital), and the irrevocability of investment projects is obvious. 368 L. JIANQIANG ET AL. Labour Contract Law directly increases the cost of enterprise to fire workers and the irrevocability of corporate investment project: (1) as the labour protection law came into force, some labour contracts signed before had not yet expired (3 years or 5 years). Before the contract expires, these workers cannot be fired, therefore cannot be replaced by material capital (technology); (2) the implementation of Labour Contract Law requires companies to sign a contract with all employees, and workers without contracts need to sign formal contracts. Becker and Elfstrom (2010), Li and Freeman (2015) find that the implementation of Labour Contract Law significantly increases the number of workers who signed the labour contract. The fact proves that the signing rate increases from 43% in 2006 to 60% in 2008, and then to 62% in 2009, which shows that the signing rate is on the rise year by year; (3) Labour Contract Law has increased the number of labour union organisation, which further increases the firing cost of enterprises. Li and Freeman (2015) find that the implementation of Labour Contract Law in 2008 increases the number of labour union organisation by 3% compared with 2006; (4) the Labour Contract Law reduces the cost of safeguarding rights and improves employees’ awareness of safe- guarding rights. When employees’ interests are violated, they begin to seek legal means, which leads to some enterprises being involved in the lengthy litigation process. In conclusion, the Labour Contract Law has increased the cost of firing employees, making it more difficult for enterprises to carry out factor substitution in a short term; thus, providing enterprises with the ability to realise factor substitution in the future with an incentive to conduct earnings management. Labour-intensive enterprises tend to have a higher labour–capital ratio, while the Labour Contract Law is a law which favours labourer. Compared with the non-labour-intensive enterprises, labour-intensive enterprises invest more labour factor, thus are more sensitive to labour shock. Therefore, the new law has a more negative impact on labour-intensive enterprises in terms of cost of labour violation and labour flexibility (Chen, Gao, & Luo, 2019; Hongbo & Shilai, 2017;Wei,Xie, & Zhang, 2017; Xie & Zhang, 2015). Based on this, hypothesis H1 of this paper is proposed: H1. The Labour Contract Law has significantly improved the level of accrual earnings management in labour-intensive enterprises. 2.2. Labour contract law and earnings management – the impact on different types of enterprises The relationship between the Labour Contract Law and earnings management is hetero- geneous. China is a dual-track economy in which state-owned enterprises and non-state- owned enterprises coexist. State-owned enterprises do not aim at making profits. In addition to the characteristics of ordinary enterprises, state-owned enterprises also have some political characteristics, such as law enforcement and economic policy implementa- tion (Yuchao, Qinglu, & Yang, 2016). Therefore, state-owned enterprises attach less importance to economic benefits than non-state-owned enterprises. Additionally, some state-owned enterprises receive financial subsidies all year round, so they are not as sensitive to changes in corporate profits as non-state-owned enterprises. Managers of CHINA JOURNAL OF ACCOUNTING STUDIES 369 state-owned enterprises have less market pressure, which leads to a lower motivation of earnings management (Xianhui & Liansheng, 2009; Yao et al., 2017). In addition, before the Labour Contract Law came into effect, state-owned enterprises were overstaffed and slow to adjust employment, while non-state-owned enterprises were flexible in employ- ment. Considering that the Labour Contract Law is for all enterprises, its impact on state- owned enterprises and non-state-owned enterprises is the same. Therefore, after the implementation of the new law, state-owned enterprises are still ‘inflexible employment’, yet non-state-owned enterprises have transformed from ‘flexible employment’ into ‘inflexible employment’ (Yuanyuan & Bin, 2014). Therefore, non-state-owned enterprises are more impacted by the Labour Contract Law and are more likely to conduct earnings management accordingly. The scarcity and irreplaceability of employees will affect the difficulty of firing employ- ees, which should regulate the relationship between Labour Contract Law and earnings management. If this view is confirmed, it further confirms that the Labour Contract Law has exerted influence on earnings management by affecting the cost of firing and decline in profits. The market supply elasticity of high-quality talents is small, and its substitut- ability is weak. Even if enterprises intend to fire them to realise factor substitution, it is difficult to find alternative labour force or technology in a short term. Therefore, enter- prises with higher-quality talents have higher firing cost. However, the supply flexibility of low-quality talents is relatively large, and there is more labour supply at the same wage level, so low-quality talents are more likely to be fired. The implementation of the Labour Contract Law has made high-quality talent-intensive enterprises remain the characteristic of ‘inflexible employment’ unchanged, but made low-quality talent-intensive enterprises transform from ‘flexible employment’ into ‘inflexible employment’. Therefore, the influ- ence of Labour Contract Law on enterprise earnings management is more obvious in low- quality talent-intensive enterprises. Labour market abundance will affect labour relations of enterprises, and further affect the relationship between Labour Contract Law and earnings management of enterprises. Derived from the research from Yao et al. (2017), if a region’s labour supply is sufficient, enterprises in the region are more likely to find alternative staff from the market, which means that the labour force is in a weak position in labour relations with enterprises. Then, the degree of effective implementation of Labour Contract Law is relatively low, which leads to the fact that the implementation of Labour Contract Law has little effect on the overall labour cost of enterprises. Therefore, enterprises bear relatively low labour cost pressure. If a region’s labour supply is not sufficient, after firing existing workers, it is hard for the enterprises in the region to find substitutes from the market. This shows that in areas with insufficient labour supply, labour holds a strong position in labour relations so that the Labour Contract Law is effectively implemented to a higher degree, leading to a greater effect of the implementation of Labour Contract Law on the overall labour cost of enterprises. Therefore, enterprises bear higher labour cost pressure. Based on this, we can conclude that the Labour Contract Law has a more obvious impact on the earnings management level of enterprises in areas with insufficient labour force. Thanks to the anonymous reviewer for his valuable advice. Through the empirical test, it is found that there is no significant difference in the degree of firing workers between the enterprises in areas with insufficient labour and those in areas with sufficient labour. 370 L. JIANQIANG ET AL. Based on the above analysis, the hypothesis H2 of this paper is proposed: H2: the implementation of the Labour Contract Law has a more significant impact on the earnings management level of non-state-owned enterprises, low-quality talent-intensive enterprises and enterprises in areas with insufficient labour. 3. Data and methods 3.1. Samples Financial data of listed companies come from CSMAR database. The sample range of this study is from 2001 to 2013. Adopt the following methods to clean the data: (1) eliminate the missing data of key indicators (total assets, number of employees, payable wages, sales, net operating cash flow, etc.); (2) eliminate some observations that are obviously inconsistent with accounting principles, including those that total assets are less than current assets, total assets are less than net fixed assets or accumulated depreciation is less than current depreciation; (3) eliminate the extreme value of key indicators (1% before and 1% after); (4) after ST and ST* companies and financial companies were excluded, 17,516 observed values were finally obtained. 3.2. Model design and variable definition In this paper, the Labour Contract Law implemented in 2008 is used as a quasi-natural experiment to build a difference-to-differences model. The regression model is as follows: EM ¼ α þ β LAW Lab Int þ β Lab Int þ β LAW þ γ LAW Trade i;t t i;t1 i;t1 t t i;t1 1 2 3 1 þ γ Trade þ γ X þ Firm FE þ Year FE þ ε (1) i;t1 i;t1 i;t 2 3 In the above function, i is the company and t is the time. EM is the main explained variable, representing earnings management; LAW is the Labour Contract Law implemented in 2008; Lab_Int represents labour intensity; Trade represents provincial foreign trade inten- sity; X is the control variable; Firm FE and Year FE represent firm fixed effect and annual fixed effect, respectively. Individual clustering standard error is used in regression. The coefficient that we are interested in is β . The result that β is significantly greater than 0 1 1 indicates that the Labour Contract Law improves the earnings management level of enterprises, while the result that β is significantly less than 0 indicates that the Labour Contract Law reduces the earnings management level of enterprises. The construction process of earnings management indicators is as follows: Accrual earnings management refers to the operation that by changing the accounting policy, the enterprise confirms the income in advance and confirms the expenditure later, in order to increase the current profit. According to the adjusted Jones (1991) model, accrual earnings management is calculated, and regression is carried out for model (2) in different industries and years: TAC 1 ΔSALE ΔREC FA i;t i;t i;t i;t ¼ α þ α þ α þ ε (2) 1 2 3 i;t Asset Asset Asset Asset i;t1 i;t1 i;t1 i;t1 CHINA JOURNAL OF ACCOUNTING STUDIES 371 TAC ¼ NET CFO (3) i;t i;t i;t TAC represents the total accrued profit of enterprise i in year t, NET represents i,t i,t the net profit of enterprise i in year t,and CFO represents the operating cash flow i,t of enterprise i in year t. Asset is the total assets for the company i at the end i,t-1 of year t-1. Δ SALE represents the changing value that business income of i,t enterprise i in year t compares with that in year t-1. ΔREC represents the changing i,t value of receivable account in year t, compared with year t-1. FA represents i,t company fixed assets at the end of year t. Estimation is carried out for model (2) in different industries and years, and the residual obtained is the discretionary accruals (DAC) of the enterprise in year t. Lab_Int represents labour intensity, defined as the number of employees divided by product sales and then taken the natural logarithm. The variable of the imple- mentation of Labour Contract Law is LAW, whose value is 1 in 2008 and thereafter, and 0 before 2008. In order to reduce the impact of the international financial crisis in 2008, we calculate the foreign trade intensity (Trade) in each province, expressed by the average value of annual trade volume of each province from 2001 to 2007 dividedbyGDP.We adopt theexchange rateconverted thetotal tradevolumeto 2007 (2007 = 1). This paper also controls a series of control variables which change over time, including firm size (Size), ROA, Tobin Q (TQ), capital structure (Lev), corporate age (Age), stock returns (Return), institutional shareholding (Holding), Herfindahl–Hirschman Index (HHI) as well as the square of Herfindahl–Hirschman Index (HHI ), and specificdefinitions are shown in Table 1. The extreme value of 1% is taken from the two sides of the continuous variable, making the explanatory variable lag for one period and controlling the enterprise and time fixed effect in the regression. Table 1. Variable definitions. Variable Variable definitions Explained variables: DAC Accrual earnings management, see model (2) Explanatory variables: LAW In 2008 and after, it was 1 and before 2008, it was 0. Lab_Int The labour intensity is equal to the average value of Ln (number of employees/revenue from product sales) of each enterprise from 2001 to 2007. The unit of revenue from product sales is RMB 100 million. Trade Trade represents the intensity of foreign trade, which is equal to the average value of Ln (trade volume/GDP) of each province from 2001 to 2007. The total trade volume is adjusted by the exchange rate of RMB to USD. The exchange rate is adjusted to 2007, which is equal to 1. Size The natural logarithm of total assets Lev Total liabilities/total assets ROA Net profit divided by total assets TQ Tobin Q Return Annual return on an individual stock, regardless of cash dividends reinvested Holding Shareholding ratio of institutional investors Age The natural logarithm of the number of years from the establishment of a company to the year of investigation HHI The natural logarithm of the Herfindahl–Hirschman Index calculated from a four-digit industry code HHI Square of Herfindahl–Hirschman Index 372 L. JIANQIANG ET AL. 4. Analysis of empirical results 4.1. Descriptive statistics Descriptive statistics are reported in Table 2. It can be seen that discretionary accrual earning management (DAC) is 0.007. The variable distribution of earnings management indicator in this paper is similar to previous studies (Chuntao, Min, & Xuan, 2016; Jian et al., 2016; Yao et al., 2017). The average labour intensity is 0.35. Descriptive statistics of control variables are in line with expectations. Table 3 reports the correlation coefficients between variables and it can be found that there is a significant correlation between most variables. 4.2. Basic regression Table 4 shows the regression results of Labour Contract Law, labour intensity and enterprise earnings management. Regression results controlling for annual and individual fixed effects are reported in column (1). It can be found that the cross-multiplicative coefficient of labour intensity (Lab_Int) and policy variable (LAW) is significantly positive at the level of 1%, which shows that the Labour Contract Law has led to a significant increase in accrual earnings management of labour-intensive enterprises. In column (2), control variables are added on the basis of column (1). The regression results show that the cross- multiplicative coefficient Lab_Int × LAW is still significantly positive at the level of 1%, indicating that the Labour Contract Law leads to a significant increase in earnings management of labour-intensive enterprises. In terms of control variables, financial crisis has a negative impact. Enterprise size and corporate age are positively correlated with earnings management, and other control variables are in line with expectations. In conclusion, the results of basic regression show that the implementation of Labour Contract Law significantly improves the accrual earnings management of enterprises, thus hypothesis H1 is verified. 4.3. Further analysis Table 2. Descriptive statistics. Variables Observations Mean S.E Min P25 Median P75 Max DAC 17,516 0.007 0.009 0.000 0.000 0.005 0.011 0.273 Law 17,516 0.658 0.475 0 0 1 1 1 Lab_Int 17,511 0.353 0.049 0.150 0.328 0.360 0.386 0.511 The Trade 17,516 0.457 0.350 0.059 0.108 0.339 0.740 0.982 The Size 17,516 21.454 1.144 18.954 20.674 21.319 22.072 25.274 Lev 17,516 0.373 0.153 0.048 0.267 0.385 0.482 0.865 ROA 17,516 0.034 0.061 −0.372 0.013 0.035 0.061 0.184 TQ 17,516 0.915 0.471 0.211 0.577 0.863 1.194 2.573 Return 17,516 0.217 0.378 −3.147 0.070 0.210 0.392 1.137 Holding 17,516 0.128 0.138 0 0.018 0.077 0.201 0.592 Age 17,516 2.387 0.483 1.099 2.079 2.485 2.708 3.401 HHI 17,516 2.167 0.755 0.880 1.591 1.807 2.905 4.061 CHINA JOURNAL OF ACCOUNTING STUDIES 373 Table 3. Correlation coefficient table. Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (1) DAC 1.000 (2) Law 0.233*** 1.000 (3) Lab_Int −0.024*** −0.125*** 1.000 (4) Trade 0.157*** 0.619*** −0.160*** 1.000 (5) Size 0.183*** 0.200*** 0.214*** 0.162*** 1.000 (6) Lev −0.074*** −0.071*** 0.275*** −0.118*** 0.263*** 1.000 (7) ROA 0.123*** 0.142*** −0.122*** 0.142*** 0.104*** −0.361*** 1.000 (8) TQ 0.010 0.146*** −0.210*** 0.099*** −0.421*** −0.397*** 0.186*** 1.000 (9) Return 0.169*** 0.211*** −0.125*** 0.180*** 0.268*** −0.217*** 0.790*** 0.113*** 1.000 (10) Holding 0.099*** 0.096*** −0.024*** 0.073*** 0.119*** −0.027*** 0.136*** 0.103*** 0.193*** 1.000 (11) Age 0.072*** 0.429*** 0.210*** 0.250*** 0.144*** 0.177*** −0.059*** −0.048*** −0.013* 0.091*** 1.000 (12) HHI 0.162*** 0.081*** −0.098*** 0.068*** −0.007 −0.115*** 0.071*** 0.063*** 0.071*** 0.015* −0.059*** 1.000 * and *** represent significant levels of 10% and 1%, respectively. 374 L. JIANQIANG ET AL. Table 4. Labour contract law and earnings management. DAC (1) (2) LAW × Lab_Int 0.0763*** 0.0665*** (4.419) (4.073) Lab_Int 0.1035*** 0.0806*** (10.378) (8.192) LAW 0.0026*** −0.0041*** (5.759) (−4.398) LAW × Trade −0.0047 (−0.983) Size 0.0223*** (6.000) Lev 0.0064 (0.212) ROA 0.1087 (1.400) TQ 0.0151** (2.371) Return −0.0115 (−0.677) Holding 0.0085 (0.321) Age 0.1263*** (7.550) HHI 0.0280 (0.402) HHI −0.0099 (−0.649) Firm FE, Year FE YES Observations 17,516 17,516 Adjusted R 0.061 0.071 t-values are in square brackets; ** and *** represent significant levels of 5% and 1%, respectively. The following is the same. Labour Contract Law is a comprehensive and permanent profit shock, and enterprises that can deal with its well in the future have a strong incentive to conduct earnings management in a short term. Existing studies have found that labour protection promotes enterprise innovation, prompting enterprises to adopt advanced technology to replace expensive labour force. This is more prominent in enterprises with strong R&D ability (Acharya et al., 2014;Yuanyuan&Bin, 2014). Enterprise with strong R&D ability is more capable when dealing with the shock brought by Labour Contract Law. They can overcome the adverse impact brought by the labour cost increase, realising element substitution. Therefore, they have a strong incentive to conduct earnings management after the implementation of the Labour Contract Law. Therefore, we should be able to identify that the motivation of earnings management is more obvious in enterprises with higher R&D investment. First, the verification is made from the perspective of R&D investment (R&D). According to the method of Sunder, Sunder, and Zhang (2017), R&D expenditure divided by the total assets lagging for one period represents R&D investment (R&D_Int), and the missing value is supplemented by 0. The data of R&D expenditure comes from WIND database. Since WIND database began to publish the data of enterprise R&D input in 2006, the sample (1) Use R&D expenditure divided by sales revenue to reconstruct R&D investment (R&D_Int); (2) Remove the samples lacking R&D expenditure; (3) use percentile regression method to solve the influence of outliers. The results are basically the same. CHINA JOURNAL OF ACCOUNTING STUDIES 375 investigation period of Panel A is from 2006 to 2013. In this paper, enterprises whose R&D_Int is larger than the median number are divided into groups with higher R&D investment, and enterprises whose R&D_Int is smaller than the median number are divided into groups with lower R&D investment. The regression results are shown in Table 5, Panel A. It can be seen that the higher the R&D investment is, the stronger the motivation of enterprises to carry out earnings management. The reason still lies in enterprises’ investment in R&D or their efforts to replace expensive labour force with advanced technology. Second, we examine it in terms of R&D output (patents). We define an enterprise with a patent number greater than 0 as one with strong innovation ability, where the number of patents = the number of authorised invention patent applications + the number of authorised utility model patent applications + the number of authorised design patent applications. According to Hall, Jaffe, and Trajtenberg (2005), the number of authorised patent applications is defined as the number of patent applications adjusted in the current year according to patent grants in the next 3 years. If the patents applied in the current year are authorised in the next 3 years, the number of patent applications in the current year will be included. Regression results are shown in Panel B of Table 5. It can be seen that enterprises with patent output have more significant motivation for earnings management. Panel B also shows that those enterprises with weak innovation ability also carry out earnings management. The sign of the coefficient is consistent with enterprises which have strong innovation ability, but not statistically significant. Innovative enterprises can use capital to replace labour in the future and reduce the influence of Labour Contract Law, so they will conduct earnings management in the short term. Enterprises with a high level of earnings management also show a slow decline in revenue or profits, so as to smooth profits and gradually change the plight of enterprises. In order to verify this hypothesis, we construct two indicators, naming net profit(NetPro) and sales revenue (Sale), and divide enterprises into two groups according to the level of Table 5. Earnings management motivation analysis. DAC (1) (2) Panel A: use R&D investment High investment Low investment LAW × Lab_Int 0.0585*** −0.0701 (2.903) (−0.911) Controls, Firm FE, Year FE YES YES Observations 6828 6829 Adjusted R 0.023 0.042 Panel B: use patent output Have a patent No patent LAW × Lab_Int 0.0445*** 0.0741 (2.818) (1.547) Controls, Firm FE, Year FE YES YES Observations 5858 11,658 Adjusted R 0.052 0.139 Controls include LAW × Trade, Size, Lev, ROA, TQ, Return, Holding, Age, HHI, HHI . The same below. Thanks to the anonymous reviewer for his valuable advice to make our analysis more complete. 376 L. JIANQIANG ET AL. Table 6. Earnings management and enterprise development dilemma. NetPro Sale t+2 t+2 (1) (2) (3) (4) High EM management Low EM management High EM Low EM managemen LAW × Lab_Int −1.6189*** −5.3577** −0.4672* −1.6916*** (−3.259) (−2.259) (−1.661) (−3.389) Controls, Firm FE, Year FE YES YES YES YES Observations 8758 8758 8758 8758 Adjusted R 0.044 0.043 0.107 0.118 accrual earnings management. Two groups are of high level of earnings management and low level of earnings management, respectively. We then analyse the impact of Labour Contract Law on enterprise development. The regression results are shown in Table 6. It can be seen that the cross-multiplicative coefficient LAW × Lab_Int is significantly negative in all four columns, but the absolute value of the coefficient in columns (1) and (3) is less than the absolute value of the coefficient in columns (2) and (4), which indicates that the enterprise with high level of earnings management has less decline in its profit or sales revenue. This is consistent with our expectation. In the future, enterprises that can mitigate the impact and gradually eliminate the impact of Labour Contract Law will carry out earnings management. In conclusion, after the implementation of Labour Contract Law, compared with enterprises with low innovation ability, enterprises with high innovation ability have a higher level of short-term earnings management. 4.4. Heterogeneity analysis The logical relationship between Labour Contract Law and earnings management is different in different enterprises. Firstly, the difference between state-owned enterprises and non-state-owned enterprises is analysed. According to the ‘direct controlling share- holder’ and ‘actual controlling person’ of listed companies, the sample enterprises are divided into state-owned enterprises and non-state-owned enterprises. The regression results are shown in Table 7, Panel A. It can be seen that the Labour Contract Law significantly promotes the earnings management of non-state-owned enterprises but has no significant impact on state-owned enterprises. Derived from the study of Jue and Jigao (2018), we define that talent intensity is the number of employees with a bachelor’s degree or above divided by the total number of employees. If the abovementioned quotient is larger than the median number, the certain enterprise can be defined as a high-quality talent-intensive enterprise. If the quotient is less than the median number, this enterprise can be defined as low-quality talent-intensive one. The educational background information of enterprise employees comes from the CSMAR database and manual collection. Regression results are shown in Table 7, Panel B. It can be seen that the cross- multiplicative coefficient LAW × Lab_Int in column (2) is significantly positive, while the cross- multiplicative coefficient LAW × Lab_Int in column (1) is positive, but not significant, which indicates that compared with high-quality talent-intensive enterprises, low-quality talent-inten- sive enterprises have higher earnings management level. Two-period lagged regression results are adopted here, and the first and third lag periods are basically the same. CHINA JOURNAL OF ACCOUNTING STUDIES 377 Table 7. Heterogeneity analysis. DAC (1) (2) Panel A: state-owned enterprises and non-state-owned enterprises SOE Non-SOE LAW × Lab_In 0.0415 0.0768*** (1.201) (3.546) Controls, Firm FE, Year FE YES YES Observations 6117 11,397 Adjusted R 0.047 0.089 Panel B: analysis of talent intensity (high-quality talent intensity and low-quality talent intensity) High-quality Low-quality LAW × Lab_Int 0.0106 0.0189*** (0.492) (3.065) Controls, Firm FE, Year FE YES YES Observations 8758 8758 Adjusted R 0.144 0.052 Panel C: analysis of labour sufficiency (areas where labour is sufficient and areas where labour is not) Sufficient Insufficient LAW × Lab_Int 0.0228 0.0635*** (0.471) (3.576) Controls, Firm FE, Year FE YES YES Observations 8758 8758 Adjusted R 0.070 0.066 Labour abundance will affect the relationship between Labour Contract Law and earnings management. We use the number of employed population in each province to show the labour abundance of each region. The province whose number of employed population is higher than its median is defined as the area with sufficient labour, while the province whose number of employed population is lower than its median is defined as the area with insufficient labour. The number of employed population in each province comes from China Industry Statistical Yearbook. The regression results are shown in Table 7, Panel C. Regression results show that the cross-multiplicative coefficient LAW × Lab_Int in column (2) is significantly positive, while the cross-multiplicative coefficient LAW × Lab_Int in column (1) is positive, but not significant, indicating that the Labour Contract Law has a more significant impact on earnings management of enterprises in areas with insufficient labour force. In a word, through the heterogeneity analysis, it finds that the implementation of Labour Contract Law significantly improves the earnings management level of enterprises, low-quality talent-intensive enterprises and enterprise in areas with insufficient labour force. However, it has no significant influence on the earnings management level of state-owned enterprises, high-quality talent-intensive enterprises and enterprises in areas with sufficient labour force. Therefore, hypoth- esis H2 is verified. 5. Robustness test 5.1. Dynamic analysis DiD estimation must meet the parallel trend hypothesis, which requires that the treat- ment group and the control group have a stable level of earnings management before the implementation of the Labour Contract Law. Despite the fact, the implementation of the 378 L. JIANQIANG ET AL. Labour Contract Law for the enterprise is exogenous, the policy has already set in June 2006. Therefore, enterprises may anticipate the impact of policymaking on enter- prise operation and thus carry out earnings management in advance, which may lead to significant changes in the earnings management level of enterprises before the imple- mentation of the Labour Contract Law. This means that there is a reverse cause and effect problem in time sequence, which makes the causal relationship between Labour Contract Law and enterprise earnings management identified in this paper biased. Meanwhile, the influence of Labour Contract Law on earnings management of enterprises may lag. Therefore, with reference to the research of Bertrand and Mullainathan (2003) and Fang, Lerner, and Wu (2017), the following model is constructed to test the parallel trend hypothesis and dynamic analysis: 2 1 EM ¼ α þ β Lab Int BEFORE þ β Lab Int BEFORE i;t i;t1 i;t1 1 2 þ β Lab Int EVENT þ β Lab Int AFTER þ β Lab Int i;t1 i;t1 i;t1 3 4 5 2 3 4 AFTER þ β Lab Int AFTER þ β Lab Int AFTER i;t1 i;t1 6 7 5 2 1 (4) þ β Lab Int AFTER þ τ BEFORE þ τ BEFORE þ τ EVENT i;t1 1 2 3 1 2 3 4 5 þ τ AFTER þ τ AFTER þ τ AFTER þ τ AFTER þ τ AFTER 4 5 6 7 8 þ τ Lab Int þ γ LAW Trade þ γ Trade þ γ LAW 9 i;t1 t i;t1 i;t1 t 1 2 3 þ γ X þ Firm FE þ Year FE þ ε i;t1 i;t −2 −1 In 2006, BEFORE is 1, and others are 0. In 2007, BEFORE is 1 and others are 0. The Labour Contract Law was implemented in 2008, and the EVENT value is 1, while others are 0. In 1 2 3 2009, AFTER is 1, and others are 0. In 2010, AFTER is 1, and others are 0. In 2011, AFTER is 4 5 1, and others are 0. In 2012, AFTER is 1, and others are 0. In 2013, the value of AFTER is 1, and other values are 0. The other variables are defined in the same way as model (1). Regression is performed according to model (4), and the parallel trend test is shown in Table 8. Each column shows that in the year when the Labour Contract Law was implemented, it begins to have a significant impact on the accrual earnings management. −2 −1 It can be seen that regression coefficients of Lab_Int × BEFORE , Lab_Int × BEFORE are not significant. In other words, 2 years before the implementation of the Labour Contract Law in 2008 (2006 and 2007), there is no significant change in the two types of earnings management of enterprises, indicating that there is no ‘expected effect’ of the Labour Contract Law on enterprise earnings management. The regression coefficient of Lab_Int × EVENT is significant, indicating that the enterprise has carried out earnings management in the current period. In fact, before the Labour Contract Law came into effect in 2008, the best strategy for companies is to reduce costs as much as possible without any adjust- ments, and only after the new law came into effect could companies be forced to increase production costs. It should be noted that, we also find that the effect of Labour Contract Law on enterprise earnings management is reversed. The coefficient of Lab_Int × AFTER is significantly positive, while that of Lab_Int × AFTER is significantly negative, which indicates the inversion of enterprise earnings management. Faced with the impact, the enterprise cannot always carry out earnings management, since earnings management can only be a short-term behaviour. In conclusion, the dynamic analysis in Table 8 not only shows that the DiD method used in the basic regression part meets the parallel CHINA JOURNAL OF ACCOUNTING STUDIES 379 Table 8. Parallel trend hypothesis test. DAC −2 Lab_Int × BEFORE −0.0070 (−0.433) −1 −0.0039 Lab_Int × BEFORE (−0.183) Lab_Int × EVENT 0.0871*** (3.996) 0.0593*** Lab_Int × AFTER (2.843) Lab_Int × AFTER 0.0030 (0.160) 0.0566*** Lab_Int × AFTER (3.254) Lab_Int × AFTER 0.0399** (2.395) −0.0525** Lab_Int × AFTER (−2.003) −2 BEFORE 0.0000 (0.046) −1 −0.0012* BEFORE (−1.810) EVENT −0.0016** (−2.232) −0.0004 AFTER (−0.629) AFTER 0.0003 (0.476) −0.0005 AFTER (−1.172) AFTER −0.0007* (−1.793) 0.0008** AFTER (2.268) Controls, Firm FE, Year FE YES Observations 17,516 0.072 Adjusted R trend test, but also shows that the influence of Labour Contract Law on enterprise earnings management is a short-term behaviour with earnings management inversion. 5.2. PSM-DiD analysis Implementation of Labour Contract Law belongs to an exogenous shock; therefore, the endogeneity problem can be effectively overcome in the empirical analysis. However, there are inherent differences between labour-intensive and capital-intensive enterprises in various aspects. Although we have controlled possible differences in the regression, we still cannot rule out endogenous problems made by sample selection bias. In order to overcome this defect, we use the Propensity Score Matching – Difference-in-Differences strategy (PSM – DiD) to analyse. According to the classification of labour intensity, enterprises with labour intensity ranking above 75 quantile are defined as labour-intensive enterprises. Referring to Fang et al. (2017), we conduct one-to-one neighbour matching according to the enterprise size, We also tried to make a classification by using the median of labour intensity and found that the conclusion was still valid. 380 L. JIANQIANG ET AL. ROA, Tobin Q, capital structure, corporate age, stock return, institutional shareholding ratio, Herfindahl–Hirschman Index and the square of Herfindahl–Hirschman Index from 2001 to 2007, and finally get 645 matching enterprises. Regression results using matched samples are shown in Table 9. By matching, the difference between the treatment group and the control group is eliminated, so an effective causal inference can be obtained. Panel A reports the difference comparison between the samples of the treatment group and the control group after matching, and the result shows that there is no significant difference between the treatment group and the control group, which provides the premise for the following matching sample analysis. Panel B and Panel C report the results of multivariate regression analysis of matched samples, and the results still support basic regression. 5.3. The impact of the 2008 financial crisis The relationship between Labour Contract Law and earnings management identified in this paper may be affected by the 2008 international financial crisis. This paper uses the method of natural experiment. The causing event is the Labour Contract Law implemented in 2008, but the international financialcrisisalsohappenedin the same year. Therefore, the impacts of Labour Contract Law and the financial crisis are intertwined, and it is difficult to distinguish which event has an impact on enterprise earnings management. Table 9. Multiple regression analysis of matched samples. Treatment group Control group Different (labour-intensive) (capital intensive) (treatment group – control group) t-Statistic Panel A: balance test Size 21.2810 21.2380 0.0430 0.77 Lev 0.4052 0.3976 0.0076 0.98 ROA 0.0253 0.0209 0.0044 1.14 TQ 0.7981 0.8092 −0.0111 −0.46 Return 0.1576 0.1313 0.0263 1.44 Holding 0.1120 0.1126 −0.0006 −0.15 Age 2.2003 2.1968 0.0035 0.11 HHI 1.8601 1.8593 0.0008 0.04 HHI 3.8653 3.9110 −0.0457 −0.27 Treatment group The control group Diff (labour-intensive) (capital intensive) (treatment group – control group) Diff-in-Diff Panel B: multiple regression analysis of matched samples Before 0.0053 0.0026 0.0027*** After 0.0071 0.0039 0.0032*** After-Before 0.0018*** 0.0013*** 0.0005*** Panel C: multiple regression analysis of matched samples DAC LAW × Lab_Int 0.0676*** (4.760) Controls, Firm FE, Year FE YES Observations 8324 Adjusted R 0.067 CHINA JOURNAL OF ACCOUNTING STUDIES 381 To rule out the financial crisis impact on the results of this paper, in addition to the control of foreign trade intensity, we also made following treatments: considering the heterogeneity of the impact of the 2008 international financial crisis on enterprises, the financial crisis has a greater impact on export-oriented enterprises and a smaller impact on domestically oriented enterprises. If we can identify the relationship between the Labour Contract Law and the enterprise earnings management in the enterprises focusing on domestic sales, it indicates that the conclusion of this paper will not be changed by the impact of the financial crisis. We limit the sample only to domestically oriented enterprises for regression. Domestically oriented enterprises are defined as enterprises without exports in 2007, while export-oriented enterprises are defined as enterprises with exports in 2007 The regression results areshown in column (1)of Table 10. It can be seen that the cross-multiplicative coefficients of LAW × Lab_Int are significantly positive at the level of 1%, and the regression results are basically con- sistent with the conclusions of the basic regression. 5.4. Other robustness tests A series of other robustness tests are also conducted in this paper. (1) The regression results of non-controlling annual fixed effect are reported in column (2) of Table 10. It can be seen that the regression results of non-controlling annual fixed effect in the model are similar to those of controlling annual fixed effect. (2) The regression is conducted by using cross-multiplicative labour intensity construction in the year before the implementation of Labour Contract Law, andthe results are shownincolumn(3) of Table 10.(3) Accordingtothe studyofXiaoran and Yujie (2016), the labour intensity of each year from 2001 to 2013 is used, and the regression results are shown in column (4) of Table 10. (4) The natural logarithm of the number of employees of each enterprise in each year from 2001 to 2007 is divided by the average of the natural logarithm of total assets as the labour intensity, and the regression results are shown in column (5) of Table 10. (5) Considering the regional clustering may lead to our recognition of Labour Contract Law and the relationship between the enterprise earnings management only appears in some large cities, and there is no suchrelationshipinothersmalland medium-sized cities. In order to test this hypothesis, we eliminate Beijing, Shanghai, Guangzhou, Shenzhen out of the sample with the regression results shown in the first column (6) Table 10.(6) Considering that the relationship between Labour Contract Law and enterprise earnings management may come from the entry of newly listed enterprises, a balanced sample is Table 10. Other robustness tests. DAC (1) (2) (3) (4) (5) (6) (7) LAW × Lab_Int 0.0453** 0.0690*** 0.0488* 0.0592*** 0.0499*** 0.0779*** 0.0846** (2.438) (4.541) (1.745) (5.131) (3.982) (4.378) (2.371) Controls, Firm FE, Year FE YES YES YES YES YES YES YES Observations 9609 17,516 17,516 17,516 17,516 14,003 8073 Adjusted R 0.044 0.069 0.063 0.065 0.063 0.079 0.068 Considering that the 2008 international financial crisis may also have an impact on domestically oriented enterprises, we further analyse with the Difference-in-Difference-in-Differences (DDD) strategy and find that the conclusion is still valid.. 382 L. JIANQIANG ET AL. used for testing, and the test results are shown in column (7) of Table 10.Itcanbe found from all the results in Table 10 that the conclusion of basic regression is still robust. 6. Conclusion and revelation Taking the implementation of Labour Contract Law in 2008 as an opportunity, this paper empirically analyses how profit shock on enterprises causes them to respond by using earnings management. The findings are as follows: (1) Labour Contract Law causes labour-intensive enterprises to conduct earnings management in a short time to cope with profit shock; (2) in the long run, earnings management gradually weakens and reverses in the fifth year; (3) since enterprises with strong innovation ability can use advanced technology to replace expensive labour force, they have a stronger ability to overcome the adverse impact of Labour Contract Law in the future and have a more obvious motivation to conduct earnings management in the short term. (4) Further analysis shows that the Labour Contract Law has improved the earnings management level of non-state-owned enterprises, low-quality talent-intensive enterprises and enter- prises in areas with insufficient labour force, but has no significant impact on state- owned enterprises, high-quality talent-intensive enterprises and enterprises in areas with abundant labour force. The conclusion of this paper shows that the Labour Contract Law increases the labour cost and firing cost of enterprises, which in turn protects the interests of enterprise employ- ees, and this is consistent with the legislative purpose of the Labour Contract Law. However, Labour Contract Law has brought a direct short-term profit shock to enterprises, forcing them to adopt earnings management to respond, which may have an adverse effect on the efficiency of capital market. This shows that the Labour Contract Law may distort enter- prise behaviour while bringing benefits. In conclusion, this paper deeply analyses the long- term profit impact of Labour Contract Law and the short-term response of enterprises, revealing the logical link between the legal system (permanent shock) and the financial 9 10 behaviour of micro-enterprises. The study of this paper has some limitations. The reversal of earnings management in the fifth year may not mean the disappearance of earnings management. In particular, there shall be a reversal for accrual earnings management in a certain period. Due to the paper length and implementation difficulty, it is not further discussed whether the enterprise has taken other substantive reform measures after the disappearance of earnings management (such as strengthening technology, etc.). In future work, we will continue to have a deep reflection on this content Thanks to the anonymous reviewer for his valuable advice. Through the empirical test, it is found that there is no significant difference in the degree of firing workers between the enterprises in areas with insufficient labour and those in areas with sufficient labour. (1) Use R&D expenditure divided by sales revenue to reconstruct R&D investment (R&D_Int); (2) Remove the samples lacking R&D expenditure; (3) use percentile regression method to solve the influence of outliers. The results are basically the same. Thanks to the anonymous reviewer for his valuable advice to make our analysis more complete. Two-period lagged regression results are adopted here, and the first and third lag periods are basically the same. We also tried to make a classification by using the median of labour intensity and found that the conclusion was still valid. Considering that the 2008 international financial crisis may also have an impact on domestically oriented enterprises, we further analyse with the Difference-in-Difference-in-Differences (DDD) strategy and find that the conclusion is still valid.. CHINA JOURNAL OF ACCOUNTING STUDIES 383 Disclosure statement No potential conflict of interest was reported by the authors. Funding This research was supported by Zhejiang Provincial Natural Science Foundation of China under Grant No. LY18G020001. References Abel, A.B., & Eberly, J.C. (1996). Optimal investment with costly reversibility. The Review of Economic Studies, 63(4), 581~593. Acharya, V.V., Baghai, R.P., & Subramanian, K.V. (2014). Wrongful discharge laws and innovation. Review of Financial Studies, 27(1), 301~346. Autor, D. H., Kerr W. R., & Kugler A. D. (2007). Does employment protection reduce productivity? Evidence from US states. The Economic Journal, 117(521), F189~F217. Bai, J., Fairhurst, D. J., & Serfling, M. (2019). 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