AAA Spark Meeting of Regions

The Effect of Community Social Capital on Non-Profits’ Governance and Disclosure Quality

• In Event: CSR: Non-Compliance with Accounting for Contingencies

Abstract

The study hypothesizes and expects to find that the community social capital of an NPO headquarter area has a positive (or negative) impact on its governance. The positive relationship suggests that NPO social capital and governance play a complementary role, where managers in high social capital face strong disciplinary environment and enjoy strong social connections and professional reputations and thus have fewer incentives to resist the adoption of good governance practices. Alternatively, the negative relationship suggests that the value relevance of social capital is higher for NPOs with weak governance because the external disciplinary mechanisms provided by social capital substitute the need for NPO investment on governance.
Similarly, the study also hypothesizes and expects to find that the community social capital of an NPO headquarter area has a positive impact on its disclosure quality. This finding suggests that community social capital disciplines NPO self-interested managers' behavior to manipulate financial numbers in Form 990 disclosures. The results from this study would be consistent with the social norms (Kohlberg 1984) and structural theories (Bourdieu, 1989; Lin, 1999; Payne et al., 2011) of social capital in that both norms and networks components of social capital discipline self-interested managers' behavior. The disciplinary forces from the community social capital either complement or substitute NPO internal governance. In addition, these disciplinary forces reduce the managerial self-interested motives to manipulate financial numbers in Form 990, and thus increase the quality of Form 990 disclosures (i.e., disclosure quality). This study complements and extends prior literature on NPO governance and disclosure quality. Finally, this paper also contributes to the research examining the effect of community social capital on entities' corporate policies. The results of this study can help auditors, regulators, donors, creditors, and other stakeholders of the NPOs. Since NPOs headquartered in the high social capital region receive added disciplinary forces from the community and provide high disclosure quality, stakeholders such as auditors, regulators, donors, and creditors may collect soft information about these NPOs' trustworthiness and reputation. Finally, this study adds contributions to advancing the knowledge about agency theory in the area of understanding stakeholders’ perceptions of NPOs’ governance and disclosure quality and in confirming and extending social norms and structural theories of social capital.

Author

• Meena Subedi, University of Wisconsin Whitewater