Social Capital, Corporate Reporting Culture, and Accounting Conservatism
60 Pages Posted: 30 Sep 2022
Date Written: September 26, 2022
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: Suggested Citation