Community Social Capital and Accounting Conservatism

Abstract

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 can exhibit associated economic outcomes and financial qualities. Our study examines the impact of a critical firm-level qualitative characteristic, community social capital, on firm accounting conservatism. The results of our research show firms headquartered in areas of high community social capital tend to exhibit less accounting conservatism. These findings suggest high community social capital mitigates issues related to contracting efficiency, social disciplinary instruments, and information asymmetry, reducing the corporate impetus for using accounting conservatism. We apply alternative proxies for community social capital, and further robustness analyses include entropy balance matching and instrumental variable regressions. Our study extends and complements literature investigating the effects of various firm-specific traits affecting accounting conservatism and contributes to research examining the effect of community social capital on corporate policies. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: A13; D91; M14; M41; Z13.