Smooth moves can yield stability for companies and unions

Published: 2014-01-27

Assistant Professor Sophia Hamm

Because of the attention it gets in the markets, income volatility remains a very real concern for company managers. Income smoothing -- the act of stabilizing a firm’s business operations, which can include accounting practices intended to level out net income fluctuations from one period to another -- is claimed or considered to be valuable in demonstrating stability to stakeholders. But what if those stakeholders are labor unions?

Research by Fisher’s Sophia Hamm suggests that income smoothing is significantly and positively related to the strength of a labor union and can benefit companies and unions. The study found that:

  • Companies with strong labor unions have greater incentive to smooth earnings and maintain the performance of previous periods rather than simply reducing reported earnings to avoid sharing proceeds with employees
  • In addition to accounting-based smoothing practices, managers at companies with strong labor unions are more likely to adjust research and development expenditures -- i.e., spending less in lean years and more in productive years -- to achieve smoother earnings paths

Smoother earnings translate into increased predictability about a firm’s future operating performance, thus reducing a union’s concern about job security. This smoother earnings path creates a win-win for managers and unions.