A B S T R A C TThis study examines the effect of labor union on the extent of real earnings management using 3,375 firm-year observations of listed Korean firms over [2002][2003][2004][2005][2006][2007][2008]. The empirical results suggest that labor unionization rate is positively associated with real earnings management and the absolute value of each real earnings management proxy. Further, these empirical results are more pronounced in non-chaebol firms. The additional robustness tests using union existence as a supplementary proxy of labor union strength and 2SLS regression supports above findings. Thus, we conclude that labor unions push managers to increase real earnings management to create a favorable negotiation environment for wage maximization and hired managers collude with labor union to receive cash-based bonus incentive.

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