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

Abstract

This study examines whether the revelation of corporate accounting misconduct in a community is associated with an increase in neighborhood crime. We find that the revelation of an Accounting and Auditing Enforcement Release (AAER) in a city is associated with a subsequent increase in neighborhood-level financially motivated crime (robberies, thefts, etc.). We provide evidence that the increase in crime is incremental to the inclusion of a number of economic controls, the addition of local fixed effects, and a matched sample analysis.

Further, we find that the association between the revelation of an AAER and neighborhood financial crime is strongest in communities where:

1) the misconduct is more salient to the local citizenry (i.e., smaller locations) and,

2) in locations where there is greater income inequality.

Further, we find that the crime rate is approximately 3.3% higher in the year after the revelation of an AAER and remains at an elevated level for three to four years. In sum, our evidence suggests that accounting misconduct in corporations can spillover to crime in the local community.

Keywords: Accounting Misconduct; AAER; Crime; Social Norms

JEL Classification: M41; G30; D91