The Sheep Watching the Shepherd : Employee Representation on the Board and Earnings Quality

This study investigates to what degree employee representatives contribute to the board's monitoring of earnings quality. Using a sample of firms listed on the Stockholm Stock Exchange (2006-2014), we find evidence for lower abnormal accruals as well as less excessive R&D cuts in firms with employee representation, controlling for alternative model specifications and potential sample selection bias. Additional analyses also reveal that earnings quality varies with the characteristics of employee representatives. This study has implications for the corporate governance literature on boards' monitoring and financial reporting quality, and it examines a less noticed aspect of board diversity, i.e., employee representation