Unearthing the Negative Consequences of Managing to Quarterly Earnings

A 2017 study on workplace injuries spurs more research on perils of corporate short-termism

The dark art of public company C-suites deploying short-term strategies such as spending cuts and pushing the troops to deliver more, faster has long been studied in relation to how it impacts shareholders. Actively managing to meet earnings can keep a stock from cratering in the short term when a miss is avoided, but the strategy can cause longer-term performance headwinds, as those short-term moves impact operations, if not workplace culture.

Spurred on by research published in the Journal of Accounting and Economics in 2017 by UCLA Anderson’s Judson Caskey and the University of Texas-Dallas’ Naim Bugra Ozel, accounting academia has been busy expanding the understanding of the downstream effects of actively managing to deliver quarterly earnings. 

Caskey and Ozel’s research showed that firms most at risk of missing on quarterly earnings expectations reported higher incidences of workplace injuries. That has unleashed multiple studies on the relationship between financial pressure and workplace safety, and influenced research into other potential nonfinancial impacts when management is under the most pressure to deliver on earnings. 

Acknowledging the influence of Caskey and Ozel’s work, the American Accounting Association’s Financial Accounting and Reporting Section named “Earnings Expectations and Employee Safety” its 2022 best paper. (The award is based on research published within the past five years.)

The analytical construct Caskey and Ozel developed for how to identify firms most pressured to deliver on quarterly earnings expectations has been adopted by researchers furthering the study of how this short-termism can impact more than stock price. The database they created that merged Occupational Safety and Health Administration workplace injury data between 2002-2011 with Compustat information that connected each individual workplace to a parent company, remains available to other researchers.

Advancing the Accounting Ball on Earnings Pressure

Caskey and Ozel documented that firms most at risk of missing on quarterly earnings expectations reported higher incidences of workplace injuries to OSHA. Controlling for several potentially mitigating factors, the study found that injury rates were 5% to 15% higher in periods when a firm was under the most pressure to meet earnings expectations. The researchers offer evidence that the higher injury rates from those firms coincides with pushing workers to deliver more and cutting spending on safety initiatives.

Caskey and Ozel’s study followed research published a year earlier, by Jonathan B. Cohn and Malcolm Wardlaw, that established firms under cash flow pressure or increased debt had higher injury rates, and firm values fall when injury rates rise. The novelty of Caskey and Ozel’s work was its focus specifically on how pressure to make active management decisions so as to not disappoint on earnings has consequences beyond what it does to short-term stock prices. Namely, worker safety. The two studies are often cited together as foundations for the academic work that followed.

Some of the research linking financial pressure to workplace safety that stands on the shoulders of Caskey and Ozel’s study:

• A 2023 article in Organization Science found that when the stock of public companies is in the grips of short sellers, the injury rate for employees is 10% higher.
• A 2018 paper available on SSRN reported lower workplace safety among corporations at risk of missing on earnings and that were also dealing with the curveball of an increased tax bill.
• A 2021 article in Journal of Accounting and Economics finds that higher unemployment insurance benefits are associated with increased safety-related whistleblowing complaints, consistent with the benefits reducing the employees’ costs from employer retaliation.
• A 2020 article in The Accounting Review documents that, under normal circumstances, easy travel from corporate headquarters is associated with fewer workplace violations; however, that association reverses for managers under pressure to meet earnings expectations.

An emerging avenue of related research involves exploring impacts of earnings management beyond workplace safety: 

• A 2021 article published in the Review of Accounting Studies shows that firms that just meet or beat earnings expectations — i.e., under the most pressure to avoid a disappointing result — are nearly 14% more likely to commit “wage theft,” which encompasses illegal practices such as denying overtime pay and forced underreporting of hours worked. 
• A 2021 paper published in The Journal of Accounting and Economics found that state-owned enterprises in China under pressure to deliver on earnings, reported higher toxic gas emissions, as they seem to pull funding of abatement practices to reduce operating expenses.
• A study published in 2022 in the Review of Accounting Studies documents that when U.S. firms are in the crosshairs of not meeting or beating earnings estimates, their release of toxins into the environment was 15% higher, relative to quarters when the miss is too large to be managed, or the beat is so large it suggests there was no internal pressure to make sure the results would satisfy investors. 

Earnings Pressure as Workplace Safety Hazard

Caskey and Ozel leveraged workplace safety data collected by OSHA between 2002 and 2011, the last year the program was funded. Firms were required to report data for each “establishment” they operated. That is, each factory for a manufacturer or distribution center for a retailer had its own report. Caskey and Ozel omitted regulated companies, given they must comply with outside oversight of operations such as worker safety. They also omitted financial firms, as the risk of physical injury is mighty low for desk jockeys. They had more than 35,000 “establishment year” observations from 868 unique firms.

Caskey and Ozel linked each establishment to its parent company and then got down to the business of studying the OSHA-reported injury records relative to the earnings pressure the parent company was under in a given quarter.

They developed a four-tier rubric for assessing the level of earnings pressure management was feeling.

• Large Beat (by more than 2 cents) 
• Meet/Just Beat (by no more than 2 cents)
• Just Miss
• Large Miss

Following prior research that has shown the market’s obsession with quarterly earnings — stock performance is more sensitive to quarterly results than year-over-year results — Caskey and Ozel zeroed in on the safety record of establishments of firms that sorted into the meet/just beat category. These firms are considered the most “suspect” of feeling pressure to not disappoint and, thus, most likely to make short-term operational decisions to avoid that fate. 

Caskey and Ozel then analyzed the injury rate for each establishment relative to where its parent company sorted out in terms of being under pressure to not miss earnings. Their “case rate” metric measured the incidence of injury for every 100 employees. The median was 4.24 for the meet/just beat group, compared with 3.69 for the three other tiers. That translates into 1 in every 24 employees in firms under the most earnings pressure having an injury reported to OSHA compared with 1 in 27 across the three other earnings tiers.

As the graphic below further illustrates, the meet/just beat group had the lowest percentage (46.9%) of establishments reporting a low injury case rate and the highest percentage that experienced a high (26.1%) injury case rate.

Caskey and Ozel note that their core finding may be the “tip of the iceberg,” as it captures only more serious physical injuries among the (larger) firms required to report to OSHA, and OSHA did not track any of the mental health issues that may result from an intense workplace grind to meet earnings expectations.

Pushing for More Productivity

Caskey and Ozel were able to make a case that the higher injury rates flowed from management turning up the workload when it was hustling to deliver on quarterly earnings. They created a “production per employee” metric and found that it was indeed higher for workers at firms in the suspect category of meet/just beat. A 10% increase in production per employee is associated with an estimated 1% increase in injuries for firms in the suspect category compared with the three other tiers.

And they suggest there is indeed less spending on safety initiatives among firms under the most earnings pressure. Alas, worker safety spending is not a line item in financial disclosures; rather, it is piled into the reporting of selling, general and administrative expenses. Following past research, Caskey and Ozel rely on changes in discretionary spending per employee as a proxy of sorts for spending on safety measures. Here too, they find a negative correlation: As abnormal discretionary spending decreases among suspect firms, injury rates rise.

Interestingly, there’s related research published in 2020 that makes a different but compelling case for how earnings pressure can impact worker safety. It found that when public firms are taken private by private-equity firms, their worker safety record improves in the ensuing two years. Not only is the cage match of meeting analyst expectations removed, but private-equity overlords are focused on their exit strategy. That’s likely motivation to deliver a safety record that is as clean as possible in anticipation of the due diligence the firm will encounter when it’s IPO time. 

Real World Cross Checks 

Caskey and Ozel creatively delivered more ballast for their findings by taking a look at how the data crunched for three different factors that can mitigate a firm’s desire to pare their spending and commitment to worker safety when feeling pressure to meet earnings expectations. 

• Unions. Workplace safety and contracted rules on workload are typically in a union’s wheelhouse. The researchers found that injury rates were more than 6% lower among establishments of suspect firms where there was a large union presence. 
• Worker Compensation Insurance Premiums. Workers’ comp rates for each establishment are pegged to a state-level base premium that is then adjusted based on its past safety record. Caskey and Ozel surmised firms operating in a state with a high baseline rate would have a disincentive to cut safety spending, as it would only increase their already high insurance premium. Indeed, among suspect firms, the injury rates were 4.8% lower for facilities operating in states with high workers’ comp premiums compared with facilities in states charging lower base premiums.
• Government contracting. Large government contracts vet bidders for their track record on workplace safety. Once again, suspect firms that rely more on government contracts had lower injury rates than suspect firms that weren’t beholden to winning government contracts.

This line of inquiry into how earnings management might impact a stakeholder other than a shareholder was rare when the paper was first published six years ago. Its ensuing influence in directing more study of worker injury as a consequence of earnings management, and the broadening out of research into other areas such as compensation and environmental emissions serves to intensify our understanding of the negative consequence of a marketplace where analyst estimates can compel costly (bad) choices by management.