Regional Crime Rates and Reporting Quality: Evidence from Private Firms in London

Abstract

Prior literature suggests that social norms influence corporate managers’ propensity to seek private rents, thereby being associated with financial reporting quality. Analyzing private firms headquartered in London, we examine whether borough-level crime rates are associated with financial reporting quality of the residing firms. Our findings indicate that firms in a borough with higher crime rates are more likely to get involved in accruals management and real activities management. We also find that firms in such boroughs tend to exhibit higher levels of tax avoidance. Our results imply that crime rates, an extreme form of social capital breakdown, affect managerial incentives to provide credible accounting information.