Community Social Capital and Financial Reporting Quality in Nonprofits

Abstract

Based on the social norms and structural theories of social capital, our study provides evidence that the social capital of a nonprofit organization's headquarters area has a positive and statistically significant impact on its financial reporting quality. This evidence is consistent with the social capital theory view of community social capital, which argues that social capital encourages morally acceptable behavior, provides reputational capital, and has implications for organizations. Additionally, our study finds that community social capital is positively associated with the strength of nonprofits' governance and negatively associated with managerial opportunistic behavior, which in turn mediates the main relationship.

Keywords: Social Capital, Financial Reporting Quality, Nonprofit Organizations, Governance, Social Norms, Groupthink theory, Groupthink bias, Social capital theory

JEL Classification: M41, L30, Z13