Does Exposure to Crime Distort Social Norms: Evidence from Local Crime Rate and Financial Misreporting

• In Event: Break with Research and Education Poster Forum

Abstract

Akers and Jensen’s (2006) social learning theory of deviance proposes that exposure to crime increases the probability of individuals’ engaging in deviant or unethical behavior. Medical research concludes that exposure to violence makes people less empathetic to others’ pain because such exposure causes the parts of the brain responsible for empathy to experience reduced activation. This study investigates whether exposure to crime affects managers’ tendency to misreport financial statements. The results show that managers who are exposed to a higher local crime rate are more likely to engage in financial misreporting, resulting in a higher likelihood of restatements. Further analysis demonstrates that the effect is stronger in areas where managers have greater exposure to crime through media coverage. The results are robust and continue to hold after addressing the endogeneity issues. Additional analysis shows that management is more likely to hoard bad news in higher crime areas, resulting in increased stock price crash risk. Overall, the results suggest that the managers who are exposed to a higher crime rate in a local area are less likely to empathize with investors who suffer from the negative consequences of financial misreporting. This study has public policy implications and contributes to the debate about of the effect of social norms on financial reporting.

Author

• Babak Mammadov, Clemson University