AAA Spark Meeting of Regions

Community Social Capital and Accounting Conservatism

• In Event: Social Capital

Abstract

The combination of ‘peer pressure’ and ‘who you know’ in our society can be powerfully influential. Likewise, firms headquartered in high social capital locations are exhibiting strong associations with economic outcomes and financial qualities. This study examines the impact of community social capital on firms’ accounting conservatism. Following (Rupasingha et al., 2006), I further breakdown social capital into the norms and networks components and investigate the effects of these two components separately. The norms component of the social capital constrains managers’ rent-seeking behavior, thereby increasing levels of accounting conservatism. In contrast, social networks can reduce information asymmetry among network participants, thus reducing the demand for accounting conservatism from contracting perspectives. Therefore, the relationship between community social capital and accounting conservatism is an empirical question which I seek to address in this study.
My study has several contributions to the literature. First, my study extends and complements the literature investigating the effects of various firm-specific factors (i.e., corporate governance, the IFRS adoption, audit quality, managerial ability, executives’ risk-taking incentives, financial constraints, managerial overconfidence, among others) affecting accounting conservatism. I examine the impact of a critical but previously unaccounted firm-level qualitative characteristic, community social capital on a firm’s accounting conservatism. Second, this paper contributes to the literature examining the effect of community social capital on corporate policies. Jha (2019)and Jha and Chen (2015) provide evidence that firms headquartered in high social capital counties are less likely to commit financial statements misreporting; and Hasan, Hoi, Wu, & Zhang (2017b) find that firms headquartered in high social capital counties are less likely to avoid taxes. Gupta, Raman, & Shang (2018) find that the social capital of the U.S. state where a firm is headquartered is positively associated with the firm’s valuation. I extend this line of literature and investigate the impact of community social capital in increasing or decreasing firms’ accounting conservatism. Finally, my study is unique in that it looks into the norms and networks components of social capital. It is possible that norms and networks components may have opposite effects on accounting conservatism.

Author

• Michelle Li-Kuehne, Whitworth University and University of Wisconsin, Whitewater