The Local Spillover Effect of Corporate Accounting Misconduct: Evidence from City Crime Rates

Abstract

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 city crime. Our findings are consistent with the general strain theory put forth by Agnew (1992), where individuals facing strain are more likely to commit crime. In our setting, we predict that adverse shocks stemming from the fraud, strains local communities leading to the increase in crime rates. Consistent with our predictions we find that the association between fraud revelation and increased future 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; Social Norms

JEL Classification: M41; G30; D91