The Effect of Regulatory Harmonization on Cross‐Border Labor Migration: Evidence from the Accounting Profession

• Author: MATTHEW J. BLOOMFIELD,CHRISTIAN LEUZ,ULF BRÜGGEMANN,HANS B. CHRISTENSEN
• DOI: http://doi.org/10.1111/1475-679X.12155
• Published date: 01 March 2017
• Date: 01 March 2017

DOI: 10.1111/1475-679X.12155

Journal of Accounting Research

Vol. 55 No. 1 March 2017

Printed in U.S.A.

The Effect of Regulatory

Harmonization on Cross-Border

Labor Migration: Evidence

from the Accounting Profession

MATTHEW J. BLOOMFIELD,

∗ULF BR ¨

UGGEMANN,

†

HANS B. CHRISTENSEN,

∗AND CHRISTIAN LEUZ

‡

Received 19 January 2015; accepted 9 August 2016

ABSTRACT

The paper examines whether international regulatory harmonization in-

creases cross-border labor migration. To study this question, we analyze Euro-

pean Union initiatives that harmonized accounting and auditing standards.

∗Booth School of Business, University of Chicago; †Humboldt-Universit¨

at zu Berlin; ‡Booth

School of Business, University of Chicago and NBER.

Accepted by Mark Lang. We appreciate the helpful comments of Mary Barth, Jannis

Bischof, Matthias Breuer,Willem Buijink, Richard Crowley, Scott Emett, Joachim Gassen, Chris

Hansen, Alan Jagolinzer, Morris Kleiner, Michael Welker, and Steve Zeff as well as workshop

participants at Bristol University, Charles University in Prague, University of Chicago, Col-

orado Summer Accounting Research Conference, Cornell University, EAA Annual Congress

2015, University of Exeter, Frankfurt School of Finance and Management, Global Issues

in Accounting Conference 2014, IHW Halle, University of Illinois at Urbana–Champaign,

Lancaster University, London Business School, University of Manchester, University of

Paderborn, Queen’s University, Rice University, Erasmus University Rotterdam, Vienna Uni-

versity of Economics and Business, WHU, XI Workshop on Empirical Research in Finan-

cial Accounting, and University of Zurich. This study is based on data from Eurostat,

Labour Force Survey, 2002–2010. The responsibility for all conclusions drawn from the

data lies entirely with the authors. We thank Marie Johann (DAAD) for kindly provid-

ing data on the Erasmus program. Christian Leuz gratefully acknowledges research fund-

ing provided by the Initiative on Global Markets (IGM) at the University of Chicago

Booth School of Business. An online appendix to this paper can be downloaded at

http://research.chicagobooth.edu/arc/journal-of-accounting-research/online-supplements.

35

Copyright C, University of Chicago on behalf of the Accounting Research Center,2016

36 M.J.BLOOMFIELD,U.BR¨

UGGEMANN,H.B.CHRISTENSEN,AND C.LEUZ

Regulatory harmonization should reduce economic mobility barriers, essen-

tially making it easier for accounting professionals to move across countries.

Our research design compares the cross-border migration of accounting pro-

fessionals relative to tightly matched other professionals before and after reg-

ulatory harmonization. We find that international labor migration in the ac-

counting profession increases significantly relative to other professions. We

provide evidence that this effect is due to harmonization, rather than in-

creases in the demand for accounting services during the implementation

of the rule changes. The findings illustrate that diversity in rules constitutes

an economic barrier to cross-border labor mobility and, more specifically,

that accounting harmonization can have a meaningful effect on cross-border

migration.

JEL codes: D10; E24; F22; F55; F66; J44; J61; J62; K22; L51; L84; M41;

M42

Keywords: accounting harmonization; regulation; IFRS; European Union;

labor migration and mobility

1. Introduction

In recent years, we have witnessed a strong push toward global convergence

of rules in many areas of regulation. These initiatives are often intended to

ease cross-border investments and to improve the allocation of capital (e.g.,

Financial Services Action Plan; FSAP [1999]). Research in accounting and

finance has analyzed whether regulatory harmonization indeed increases

cross-border capital flows and has associated benefits such as increased

liquidity and lower cost of capital (see Leuz and Wysocki [2016] for an

overview). Capital, however, is not the only factor of production for which

diversity in rules could create economic barriers to mobility. Regulatory har-

monization should also make it easier for professionals to seek employment

outside of their home country, which in turn should improve the efficiency

of labor markets. Indeed, labor mobility could be an important adjustment

mechanism through which regions adjust to asymmetric economic shocks,

especially in a currency union such as the Eurozone (Mundell [1961], Farhi

and Werning [2014]). However, there is no evidence on the role and poten-

tial benefits of regulatory harmonization for cross-border labor mobility.

In this paper,we analyze the effects of regulator y harmonization affecting

the accounting profession in the European Union (EU) on cross-border

labor migration. This setting has several desirable features from a research-

design perspective. First, the accounting profession generally has a higher

level of standardization than comparable occupations (Madsen [2011]),

and regulatory harmonization has typically taken the form of adopting

identical rules (or standards). Both factors should make it easier to detect

an effect of regulatory harmonization on labor migration in the accounting

profession, if there is one. Second, there is free movement of labor in the

European Union. Free movement of labor ensures that we can focus on

REGULATORY HARMONIZATION AND LABOR MIGRATION 37

regulatory harmonization and economic barriers, rather than immigration

policies and other explicit restrictions. Third, there has been a relatively

sharp increase in regulatory harmonization for the accounting profession

in the European Union in recent years. In particular, two EU initiatives

have substantially harmonized the rules relevant to those working in the

accounting profession: (1) after mandatory reporting under International

Financial Reporting Standards (IFRS) publicly traded firms use identical

accounting standards, (2) Directive 2006/43/EC harmonized statutory au-

dits of companies’ annual accounts and consolidated financial statements.

We analyze changes in cross-border labor mobility around these regulatory

changes. Henceforth, we refer to these changes also as “the treatment.”

Our data are based on the EU’s annual Labour Force Survey (LFS). The

LFS is meant to generate a representative sample for each country using a

standardized methodology, which substantially improves the comparability

of mobility statistics across countries. In addition, the LFS data are collected

at the individual level, giving us a rich set of demographics to control for

other factors that affect migration. Following the literature, our main anal-

ysis is based on changes in a stock measure of migrants, that is, the number

of individuals who have a foreign nationality and were born abroad (Mart´

ı

and R´

odenas [2007], Bonin et al. [2008]). To get closer to migration flows

around regulatory changes, we also present analyses using a novel quasi-

flow measure that starts from the stock measure but counts only foreigners

who recently changed jobs and, thus, are more likely to have moved in re-

sponse to accounting and auditing harmonization.

Our identification strategy exploits that the regulatory changes pri-

marily affect the accounting profession. Thus, we perform a difference-

in-differences estimation comparing changes in cross-border mobility of

accounting professionals with changes in mobility of other professions

around regulatory harmonization. We estimate the effects relative to three

separate control groups: legal professionals, all other professionals, and a

combination of business people. We control for demographic character-

istics known to determine migration (i.e., gender, marital status, age, ed-

ucation level, and the presence of children), including all possible inter-

actions of these characteristics in order to account for nonlinearities in

these categorical demographics. In addition, we include various country-

level controls such as country-year fixed effects that account for unrelated

changes and shocks affecting labor mobility of professionals (e.g., changes

in economic growth, unemployment benefits, national adjustments to sur-

vey methodology, etc.). To further tighten our design, we perform a double-

matched difference-in-differences analysis. We pair accounting and control

professionals from a given country by the exact same characteristics (e.g.,

single males, in Germany, between 25 and 29 years old, without children,

with a university degree) for a year in the pre-treatment period and ayearin

the post-treatment period, creating a quadruplet. We then compute the rel-

ative change in mobility rates within each quadruplet. This double-matched

approach assures perfect overlap in characteristics across treatment and