Does Ownership Structure Affect Labor Decisions?

Abstract

I examine the influence of ownership structure on labor decisions by comparing how public and private banks manage their labor costs. I find that, compared to private banks, public banks grow their labor force by more when activity increases. However, due to capital market pressure, managers of public banks reduce labor costs to avoid reporting earnings declines while private banks increase labor costs around the same benchmark. In particular, I find that managers of public banks reduce labor costs to avoid reporting an earnings decline when they have diversified lines of business or when they do not make use of alternative methods of earnings management. Furthermore, public banks that reduce labor costs and report a small earnings increase experience improved subsequent performance. Overall these findings suggest that financial reporting pressure in public firms can constrain empire building by incentivizing managers to make strategic cost cuts.