Financial Reports and Social Capital

Journal of Business Ethics · 2019 · Volume 155 · Issue 2

Abstract

I examine social capital’s impact on financial reports. Based on the social capital literature, I predict that the quality of the financial reports is higher when a firm is headquartered in a region with high social capital. Consistent with this prediction, I find that the firms that are headquartered in this type of region in the USA have a lower probability of committing fraud by misrepresenting financial information. Further, I find that the firms in regions with high social capital have lower levels of discretionary accruals and much more readable annual reports.

Keywords

Financial fraud, Social capital, Financial report, Discretionary accruals, Real earnings management, Fog index

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