The Local Spillover Effect of Corporate Accounting Misconduct: Evidence from City Crime Rates
50 Pages Posted: 23 Aug 2018 Last revised: 25 Jul 2019
Date Written: July 24, 2019
This study documents a spillover effect of accounting fraud by showing that after the revelation of accounting misconduct there is an increase in financially motivated neighborhood crime (robberies, thefts, etc.) in the cities where these misconduct firms are located. We find that more visible accounting frauds (e.g., greater media attention and larger stock price declines) are more strongly associated with a future increase in financially motivated neighborhood crime. Our findings are consistent with the general strain theory put forth by Agnew (1992), where individuals facing strain are more likely to commit financially motivated crime. In our setting, we predict that adverse shocks stemming from the fraud, strains local communities leading to the increase in the rate of financially motivated crime. Consistent with our predictions we find that the association between fraud revelation and increased future financially motivated crime is strongest when local city-wide unemployment increases, where local job markets are shallower, and where local income inequality is high.
Keywords: Accounting Misconduct; AAER; Crime; Local Strain
JEL Classification: M41; G30; D91
Suggested Citation: Suggested Citation