Social Capital and Accounting Conservatism

51 Pages Posted: 24 Dec 2024

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

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Abstract

We investigate the relationship between county-level social capital in the U.S. and asymmetric earnings timeliness (accounting conservatism). We measure social capital by the strength of civic norms and the density of social networks in a community. We find that firms headquartered in regions with higher social capital have earnings that reflect bad news more quickly than good news. Two potential mechanisms driving this connection are evident in our findings. First, the positive link between social capital and asymmetric earnings timeliness is more pronounced in firms with weaker external oversight, suggesting that social capital acts as a substitute for these mechanisms by discouraging managers from delaying the recognition of bad news. Second, we illustrate that firms in high social capital regions are more likely to recruit senior executives with higher asymmetric earnings timeliness coefficients. This result implies a preference for managers who adopt more conservative accounting practices. We find similar results using an international sample of firms. Our findings offer new insights into how local social norms influence corporate financial reporting.

Keywords: Social capital, civic norms, social networks, accounting conservatism, asymmetric earnings timeliness

Suggested Citation

Afzali, Mansoor and Colak, Gonul and Hasan, Iftekhar and Martikainen, Minna, Social Capital and Accounting Conservatism. Available at SSRN: https://ssrn.com/abstract=5069826 or http://dx.doi.org/10.2139/ssrn.5069826

Mansoor Afzali

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 (Contact Author)

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

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