Social Capital, Corporate Reporting Culture, and Accounting Conservatism

60 Pages Posted: 30 Sep 2022

See all articles by Mansoor Afzali

Mansoor Afzali

Hanken School of Economics

Gonul Colak

University of Sussex ; Hanken School of Economics

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Minna Martikainen

University of Vaasa; Hanken School of Economics

Date Written: September 26, 2022

Abstract

We investigate the relationship between social capital and accounting conservatism. We argue that social capital, as measured by the strength of civic norms and density of social networks in a community, positively influences accounting conservatism by mitigating negative externalities and fostering an environment of transparency. Consistent with these arguments, we find that firms headquartered in regions with higher levels of social capital display lower levels of financial reporting opacity and engage in more conservative accounting practices. Firms in high social capital regions prefer hiring managers with proven records of transparent reporting and conservative accounting. Consequently, the managerial tendency to delay recognition of bad news, use ambiguous reporting language, and write-off assets decreases. This social capital-induced transparent financial reporting ultimately improves firms’ information environment: analyst forecast accuracy is higher and idiosyncratic volatility and firm risk are lower.

Keywords: Social capital, financial reporting transparency, accounting conservatism, corporate reporting culture, firm risk

JEL Classification: M14, M41, G3

Suggested Citation

Afzali, Mansoor and Colak, Gonul and Hasan, Iftekhar and Martikainen, Minna, Social Capital, Corporate Reporting Culture, and Accounting Conservatism (September 26, 2022). Available at SSRN: https://ssrn.com/abstract=4230516 or http://dx.doi.org/10.2139/ssrn.4230516

Mansoor Afzali (Contact Author)

Hanken School of Economics ( email )

FI-00101 Helsinki
Finland

Gonul Colak

University of Sussex ( email )

Jubilee Building
Falmer
Brighton, BN1 9SN
United Kingdom

Hanken School of Economics ( email )

P.O. Box 479
Arkadiankatu 22
FI-00100 Helsinki, 00100
Finland

Iftekhar Hasan

Fordham University ( email )

45 COLUMBUS AVENUE
GBA-5TH FLOOR
NEW YORK, NY 10023
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Minna Martikainen

University of Vaasa ( email )

P.O. Box 700
Wolffintie 34
FIN-65101 Vaasa, FI-65101
Finland
+358504681823 (Phone)

Hanken School of Economics ( email )

PoBox 479
Helsinki, 00100
Finland

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