The role of the EU non-financial reporting directive and employee representation in employee-related disclosures

Figures & data

Table 1. Variable definition.

Variable name	Variable definition and sources
Disclosure variables
References	The number of paragraphs where one of the following words (in any form) are mentioned: employee* worker* staff* personnel* [Nvivo]
Coverage	The percentage of the employee information in relation to the whole non-financial information [Nvivo]
EM_Words	Total number of employee specific words divided by total number of words in employee related disclosures. Employee specific words are based on a self-constructed dictionary which consists of 653 unique words (e.g. human rights, worker, material, notice, parental, training, union, team). The complete wordlist is provided in Online Appendix.
NumericalTerms	Any sum, date, or product specifying the facts in a given case. The dictionary contains common numbers (e.g. one, tenfold, hundred), terms indicating numerical operations (e.g. calculate, counts, percentage), and quantitative topics (e.g. digitise, tally, discounted) [DICTION]
Concreteness	A dictionary possessing no thematic unity other than tangibility and materiality (e.g. wage, finance, European, manufacturer, store, payments) [DICTION]
LM_positive	Positive word list (e.g. strong, smooth, happy, loyal) [Loughran & McDonald, 2011]
LM_uncertain	Uncertainty word list (e.g. ambiguity, approximate, assume, risk) [Loughran & McDonald, 2011]
LM_litigious	Litigious word list (e.g. legal, law, litigation, forbade) [Loughran & McDonald, 2011]
Board of directors
D_ER	A dummy: 1 = if employee representatives sit on the board, 0 = otherwise [Annual reports]
ERR	The number of employee representatives divided by the number of total board members [Annual reports]
BoardSize	The number of elected directors by the shareholders in the board [Annual reports]
OutsideDr	The number of outside directors divided by the number of total board members [Annual reports]
CEOonBoard	A dummy: 1 = if the CEO sits on the board, 0 = otherwise [Annual reports]
Firm characteristics
lnTA	The natural logarithm of total assets [S&P Capital IQ]
RoA	Return on assets, calculated as: (net Income / total assets) x 100 [S&P Capital IQ]
lnMB	The natural logarithm of market-to-book ratio, calculated as: market value of equity / book value of equity [S&P Capital IQ]
Lev	Leverage, calculated as: total debt / book value of equity [S&P Capital IQ]
Blockholders	The percentage of shares held by largest shareholders (i.e. with at least 5% of capital shares) [S&P Capital IQ]
FirmAge	Number of years since the company was founded [S&P Capital IQ]
ERRIndustry	Average percentage of employee representatives on the boards of other firms in the same industry category
OutsideCapital	A dummy: 1 = for firms that have their headquarters outside the capital region, 0 = otherwise [Retriever]

Note: The table presents definition of all variables in the analyses. The source of data collection is shown in the brackets.

Table 2. Sample.

Panel A: Sample composition			Firm-year observations
Firms listed on the Nasdaq OMX Stockholm Exchange during 2014–2019 with available annual reports and information on corporate boards:
			1,403
Less firm-year observations due to the lack of non-financial information:			−86
Less firm-year observations due to missing data for variables collected from S&P Capital IQ:			−109
Final sample			1,222
Unique number of firms in the sample			264
Panel B: Sample breakdown
Year	Total	non-ER	ER
2014	191	108	83
2015	199	110	89
2016	208	118	90
2017	213	124	89
2018	217	132	85
2019	194	119	75
Total	1,222	711	511

Note: The table presents the sample composition in Panel A, and sample breakdown by years and employee representatives (ER) in Panel B.

Table 3. Descriptive statistics and mean comparison analysis.

Panel A. Descriptive statistics
Statistics	N	Mean	Median	SD	Min	Max
Disclosure variables
References	1,222	44.154	39	28.138	1	255
Coverage	1,222	0.050	0.047	0.022	0.001	0.188
EM_Words	1,222	0.180	0.180	0.021	0.086	0.253
NumericalTerms	1,222	51.831	48.8	24.094	11.85	275.88
Concreteness	1,222	17.871	17.04	7.569	0	133.39
LM_positive	1,222	4.135	3.59	2.608	0	26.93
LM_uncertain	1,222	3.527	2.78	3.083	0	35.61
LM_litigious	1,222	1.986	1.495	1.909	0	23.1
Board of directors
D_ER	1,222	0.418	0	0.493	0	1
ERR%	1,222	9.561	0	11.916	0	44.44
BoardSize	1,222	6.804	7	1.446	3	13
OutsideDr	1,222	0.683	0.667	0.194	0	1
CEOonBoard	1,222	0.373	0	0.484	0	1
Firm characteristics
lnTA	1,222	8.336	8.248	1.949	3.459	14.57
RoA%	1,222	3.624	4.556	10.481	−48.935	28.11
lnMB	1,222	1.482	1.340	0.804	−0.962	6.892
Lev	1,222	0.620	0.473	0.639	0	3.568
Blockholders	1,222	32.989	30.244	20.912	0.200	84.41
FirmAge	1,222	59.787	40	55.821	1	410
ERRIndustry	1,222	9.561	7.586	7.740	0	44.44
OutsideCapital	1,222	0.433	0	0.496	0	1
Panel B. Mean comparison analysis of disclosure variables in firms with and without ER and before and after the regulation
Disclosure variables	Non-ER (N = 711)	ER (N = 511)	Mean difference	Before (N = 598)	After (N = 624)	Mean difference
References	34.347	57.798	23.45***	38.637	49.441	10.80***
Coverage	0.046	0.056	0.010***	0.047	0.053	0.003***
EM_Words	0.177	0.183	0.006***	0.174	0.185	0.010***
NumericalTerms	47.653	57.644	9.991***	51.709	51.947	0.23
Concreteness	17.076	18.976	1.900***	18.119	17.633	−0.486
LM_positive	4.388	3.785	−0.603***	4.167	4.105	−0.061
LM_uncertain	3.902	3.006	−0.895***	3.488	3.565	0.077
LM_litigious	2.130	1.784	−0.346**	1.935	2.034	0.098
Panel C. Mean comparison analysis of disclosure variables before and after the regulation in ER and non-ER firms
	Non-ER firms			ER firms
Disclosure variables	Before (N = 336)	After (N = 375)	Mean difference	Before (N = 262)	After (N = 249)	Mean difference
References	28.679	39.427	10.748***	51.408	64.522	13.114***
Coverage	0.042	0.049	0.007***	0.053	0.058	0.005**
EM_Words	0.172	0.181	0.009***	0.177	0.190	0.013***
NumericalTerms	47.103	48.145	1.042	57.616	57.673	0.057
Concreteness	17.420	16.767	−0.652	19.014	18.936	−0.078
LM_positive	4.432	4.347	−0.086	3.826	3.741	−0.084
LM_uncertain	4.017	3.798	−0.22	2.808	3.213	0.405*
LM_litigious	2.102	2.155	0.053	1.721	1.851	0.13

Note: The table presents the univariate analyses. In Panel A, descriptive statistics of all variables are presented; in Panel B, the mean difference t-test analysis are presented for disclosure variables, comparing ER firms and non-ER firms, and before and after the EU regulation; and in Panel C, the mean difference t-test is shown for disclosure variables, comparing before and after the regulation in sub-sample of ER and non-ER firms (***p < 0.01, **p < 0.05, *p < 0.1). A detailed description of variables is presented in Table 1.

Figure 1. (a) Employee-related disclosures over time (whole sample) (b) Employee-related disclosures over time (in ER and non-ER firms).

Note: The figure plots two disclosure variables over time. The variables are the number of paragraphs with employee-related information (Reference) and the number of employee-related words divided by the total number of words in employee-related disclosures (EM_Words). The time span includes pre – (2014–2016) and post-regulation (2017–2019) periods. Figure 1(a) and 1(b) illustrate the trend in the whole sample and separately in ER and non-ER firms, respectively.

Table 4. EU Directive, employee representatives and employee related disclosures.

Panel A: The effect of EU Directive on employee related disclosures (Model 1)
	References		Coverage		EM_Words
	Coeff.	t-stat	Coeff.	t-stat	Coeff.	t-stat
Post	13.055***	5.87	0.013***	6.53	0.012***	5.71
D_ER	8.894***	5.38	0.008***	5.42	0.004**	2.53
BoardSize	1.594***	3.14	−0.001	−1.33	0.000	0.93
OutsideDr	4.041	1.2	−0.012***	−3.8	−0.004	−0.97
CEOonBoard	−4.062***	−3.2	−0.003**	−2.46	−0.004**	−2.44
lnTA	6.304***	11.53	0.001	1.37	0.001**	2.46
RoA	0.006	0.13	0.000***	3.29	0.000***	3.36
lnMB	1.276*	1.68	0.000	−0.56	−0.004***	−3.79
Lev	−0.605	−0.54	−0.002**	−2.09	0.003***	2.8
Blockholders	−0.085**	−2.35	0.000	−0.34	−0.000***	−3.04
FirmAge	0.016	1.04	0.000	−0.3	0.000	1.4
Intercept	−56.323***	−7.78	0.030***	4.83	0.168***	23.22
Industry fixed effects	Yes		Yes		Yes
Year fixed effects	Yes		Yes		Yes
R^2	0.558		0.418		0.287
N	1,222		1,222		1,222
Panel B: The effect of employee representatives on employee related disclosures
	First stage (Model 2)		Second stage (Model 3)
	Pr(D_ER)		References		Coverage		EM_Words
	ME	z-stat	Coeff.	t-stat	Coeff.	t-stat	Coeff.	t-stat
D_ER			9.535***	5.72	0.007***	5.11	0.005***	2.9
BoardSize	0.042***	5.12	1.732***	3.18	−0.001*	−1.71	0.001*	1.73
OutsideDr	0.065	1.02	5.001	1.48	−0.013***	−3.93	−0.002	−0.4
CEOonBoard	0.024	1.03	−4.322***	−3.36	−0.003***	−2.7	−0.003*	−1.93
lnTA	0.046***	5.46	6.853***	11.43	0.000	0.74	0.002***	3.14
RoA	−0.003***	−2.97	−0.021	−0.43	0.000***	3.64	0.000***	2.96
lnMB	−0.018	−1.26	0.881	1.11	0.000	−0.36	−0.004***	−3.81
Lev	−0.009**	−2.09	−0.866	−0.75	−0.002**	−2.45	0.003***	2.94
Blockholders	0.002***	3.68	−0.077**	−1.97	0.000	−0.77	0.000	−1.52
FirmAge	0.002***	7.46	0.027	1.58	0.000	−0.9	0.000**	2.12
ERRIndustry	0.025***	13.49
OutsideCapital	0.134***	6.06
InvMills			3.092*	1.93	−0.002	−1.44	0.004**	2.1
Intercept			−67.748***	−6.43	0.039***	4.57	0.149***	15
Industry fixed effects	Yes		Yes		Yes		Yes
Year fixed effects	Yes		Yes		Yes		Yes
Pseduo R^2/R^2	0.477		0.563		0.419		0.293
N	1,209		1,209		1,209		1,209

Note: The table presents results from regression analysis on the effect of EU Directive (Post in Panel A) and employee representative (D_ER in Panel B). In Panel B, D_ER is treated as an endogenous variable and following the two step Heckman specification ERRIndustry and OutsideCapital are used as additional instruments in the first stage (the probit model). The inverse Mills ratio (InvMills) is included in the second stage to control for the selection bias. Dependent variables are disclosure variables implying the extent (Reference, Coverage) and the content (EM_Words) of employee related disclosures. t-statistics (z-statistics for the probit model) are based on standard errors that are clustered by firm and year (***p < 0.01, **p < 0.05, *p < 0.1). A detailed description of variables is presented in Table 1.

Table 5. Implementation of EU regulation in ER and non-ER firms.

Panel A. Regression outputs (Model 4)
	References		Coverage		EM_Words
	Coeff.	t-stat	Coeff.	t-stat	Coeff.	t-stat
Post	12.286***	5.73	0.015***	6.22	0.009***	3.26
D_ER	6.027**	2.44	0.003	1.29	0.008***	2.93
Post x D_ER	3.348	1.01	0.004	1.27	−0.001	−0.45
BoardSize	0.862	1.26	−0.001	−1.33	0.001	0.99
OutsideDr	3.896	1.03	−0.015***	−3.7	−0.002	−0.3
CEOonBoard	−4.636***	−3.38	−0.003**	−2.08	−0.003*	−1.72
lnTA	6.435***	9.28	0.002**	2.45	0.003***	3.87
RoA	−0.027	−0.54	0.000**	2.42	0.000	1.27
lnMB	2.247***	3.1	0.000	0.02	−0.003***	−2.6
Lev	0.926	0.71	−0.003***	−2.66	0.003**	2.28
Blockholders	−0.051	−1.04	0.000	−0.68	0.000	−0.62
FirmAge	0.061*	1.72	0.000	0.48	0.000***	3.49
InvMills	3.203	1.49	0.000	−0.16	0.007***	3.07
Intercept	−54.619***	−3.9	0.030**	2.34	0.135***	8.46
Industry fixed effects	Yes		Yes		Yes
Year fixed effects	Yes		Yes		Yes
R^2	0.537		0.424		0.287
N	863		863		863
Panel B. Estimated margins for interaction variables
	Non-ER firms			ER firms
	Before	After		Before	After
References	31.561	39.210		37.632	48.813
Coverage	0.042	0.050		0.045	0.057
EM_Words	0.173	0.180		0.181	0.186

Note: The table shows that differentiated effect of regulation in ER and non-ER firms on the extent (Reference, Coverage) and content of employee related disclosures (EM_Words). Results are based on a matched sample of ER and non-ER firms, using the propensity score matching technique with no replacement condition and caliper of 0.001. The coefficient of interaction term (Post x D_ER) shows whether there are any significant differences in disclosure changes before and after the regulation in ER and non-ER firms. t-statistics are based on standard errors that are clustered by firm and year (***p < 0.01, **p < 0.05, *p < 0.1). Panel B shows the margins for interpretation of variables underlying the interaction term. Margins correspond to the expected means of disclosure variables in ER and non-ER firms before and after the regulation.

Table 6. Analysis of the tone of employee related disclosures.

Panel A. Regression outputs for the effect of D_ER (Model 3)
	NumericalTerms	Concretness	LM_positive	LM_uncertain	LM_litigious
	Coeff. t-test	Coeff. t-test	Coeff. t-test	Coeff. t-test	Coeff. t-test
D_ER	7.128***	2.135***	−0.717***	−0.885***	−0.337**
	3.69	3.83	−3.59	−4.2	−2.25
Control variables, InvMills, industry, and year fixed effects	Yes	Yes	Yes	Yes	Yes
R^2	0.104	0.127	0.126	0.164	0.102
N	1,209	1,209	1,209	1,209	1,209
Panel B. Regression outputs for the interaction variables (Model 4)
	NumericalTerms	Concretness	LM_positive	LM_uncertain	LM_litigious
	Coeff. t-test	Coeff. t-test	Coeff. t-test	Coeff. t-test	Coeff. t-test
Post	1.306	−0.836	0.073	−0.78	−0.155
	0.47	−0.92	0.2	−1.59	−0.57
D_ER	7.302***	1.667**	−0.52	−1.559***	−0.314
	2.68	2.22	−1.46	−5.5	−1.32
Post x D_ER	−2.336	0.074	−0.004	1.247***	0.108
	−0.64	0.07	−0.01	3.29	0.36
Control variables, InvMills, industry, and year fixed effects	Yes	Yes	Yes	Yes	Yes
R^2	0.088	0.139	0.158	0.189	0.127
N	863	863	863	863	863
Panel C. Estimated margins for interaction variables
	Non-ER firms			ER firms
	Before	After		Before	After
NumericalTerms	48.307	48.558		55.615	53.651
Concretness	17.320	16.712		18.992	18.449
LM_positive	4.361	4.384		3.843	3.853
LM_uncertain	4.025	3.732		2.461	3.395
LM_litigious	2.094	2.117		1.779	1.905

Note: The table investigates the tone of disclosures using two dictionaries from DICTION: NumericalTerm and Concreteness; and three dictionaries developed by Loughran and McDonald (2011): LM_positive, LM_uncertain and LM_litigious. Panel A corresponds to Model 3 and Panel B corresponds to Model 4. Panel C shows the margins for interpretation of variables underlying the interaction term Post x D_ER. t-statistics are shown in parentheses and are based on standard errors that are clustered by firm and year (*** p < 0.01, ** p < 0.05, * p < 0.1).

Loughran, T., & McDonald, B. (2011). When is a liability not a liability? Textual analysis, dictionaries, and 10-Ks. Journal of Finance, 66(1), 35–65. doi:10.1111/j.1540-6261.2010.01625.x

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