This study investigates the effect of employee financial stress on financial reporting outcomes. Anxiety related to stress results in emotional exhaustion and reduced job performance. The conservation of resources theory predicts that anxiety caused by financial stress decreases employees’ work quality because anxiety drains individuals’ physical, cognitive, and psychological resources. Motivated by the conservation of resources theory, we expect and find that employee financial stress negatively affects financial reporting outcomes. Consistent with this prediction, we determine that employee financial stress is positively associated with material internal control weaknesses and restatements. The results are statistically and economically significant, and the results continue to hold after using alternative measures of employee financial stress and financial reporting quality. We conduct additional analyses to address endogeneity issues, and the inferences remain the same.

Data Availability: Data are available from the public sources cited in the text.

JEL Classifications: M40; M41; M49

Keywords:
financial reporting quality, internal control weakness, restatement, accruals quality, employee financial stress
2023
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