Social Capital and Bank Misconduct
79 Pages Posted: 13 Nov 2018 Last revised: 3 Dec 2019
Date Written: September 14, 2018
Using enforcement actions issued by US bank regulators to identify wrongdoing, I find that banks headquartered in counties with higher levels of social capital (as captured by civic norms and social networks) are less likely to be involved in misconduct. This result holds in a range of robustness and endogeneity tests and is supported by an analysis of bank executives’ social capital. The effect of local levels of social capital on misconduct is more pronounced for less geographically dispersed banks. I also show that banks involved in misconduct lose more market share in counties with higher levels of social capital. Taken together, these findings indicate that social capital acts as an external monitoring mechanism preventing and punishing misconduct.
Keywords: banks, social capital, misconduct, market share
JEL Classification: G21, G28
Suggested Citation: Suggested Citation