Firms' Incentive to Meet Analyst Forecast and Hiring Decision: Evidence from Job Posting

Description

In an innovation-driven economy, as human capital becomes more and more important, there is a growing interest in the study of firms' employment decisions. The biggest motivator for Amazon to choose Virginia for its second headquarter is because Virginia is committed to developing a technology talent pipeline for the future. A growing finance literature has started to investigate how a firm's financial condition affects its employment decisions. On one hand, financial distress can cause firms to downsize their workforce and/or lower wages. Survey results by Campello, Graham, and Harvey (2010) show that during the 2007-2008 financial crisis financially constrained firms planned to dramatically reduce employment by 11%, whereas financially unconstrained firms planed significantly smaller cuts. On the other hand, job candidates could also correctly perceive and respond to firms’ financial conditions. An increase in a firm's financial distress results in fewer and lower quality applicants (Brown and Matsa 2016). In their commentary on enrings management, Dechow and Skinner (2000) conclude that “managers have strong incentives to ‘beat benchmarks’. Would firms' incentives to analyst forecasts affect firms' employment decisions? As an important player of the US capital market, financial analysts could have significant impacts on firms' decision making. Prior studies have shown that investors consider analyst forecasts as the most important earnings benchmark and firms engage in various earnings management tools to meet analyst forecasts. A novel dataset with detailed information on firms' online job posting information provides us an opportunity to answer this question. First, the hiring side of firms' employment decisions is a more sensitive margin to their incentives to meet analyst forecasts. This is because firing incumbent employees may cause legal issues and damage firms' reputation, and labor protection law likely makes the process time-consuming and requires severance pay to the leaving employees. Second, the detailed information of job postings data, including job types, education and experience requirements, geographical locations, and skill requirements, allows us not only to examine the change of firms' number of recruiting, but also other dimensions of firms’ recruiting decisions. In this proposed study, we plan to 1) examine whether firms cut or delay hiring in order to meet analyst forecasts; 2) investigate the channels through which firms' incentives to meet analyst forecast affect their hiring decisions; 3) examine the potential macro effect of firms’ incentives to meet analyst forecasts on local labor markets.