AAA Spark Meeting of Regions

Internal Control Consequences of Social Capital Changes Following Corporate Headquarters Relocations

• In Event: Social Capital

Abstract

This study extends the growing literature examining the relation between the social capital level of firms’ locations and their financial reporting outcomes. We examine the relation between social capital differences among U.S. counties and internal control effectiveness immediately following headquarters relocations. We exploit a sample of over 900 relocating firms between 2004-2017. We posit that relocation leads to disruptions in the employee base which, if substantive, can cause a deterioration in internal control quality. We proxy for this disruption with absolute differences in social capital between the new and existing headquarters locations. We find that firm relocations involving higher differences in social capital have higher likelihoods of SOX 404 internal control material weakness and SOX 302 internal control weakness disclosures in the new location. Our results are robust to various model configurations, a falsification test, longer panels, and sample partitions.

Authors

• Yufan Dong, Temple University

• Jayanthi Krishnan, Temple University