Employee Satisfaction and Real Activities Earnings Management

ABSTRACT This paper examines the relation between employee satisfaction and real activities earnings management. Based on a holistic view of the balanced scorecard approach, employee satisfaction often plays a role in promoting desirable corporate outcomes. Accordingly, firms with greater employee satisfaction are considered more likely to uphold ethical standards and avoid unethical managerial practices such as real activities earnings management. My empirical analyses demonstrate a negative and significant association between employee satisfaction and real activities earnings management. The empirical results remain robust when using an alternative measure of employee satisfaction, implementing propensity score matching, and conducting sub‐sample tests. My findings align with the view that employee satisfaction plays a valuable role in promoting sustainable business practices, and they contribute to the literature on the balanced scorecard approach and earnings management.