Regional Crime Rates and Corporate Misreporting

Abstract

Prior studies document that social capital influences managers’ propensity to seek private rents. We extend this line of literature by linking regional crime rates, an indicator of extreme breakdown of social capital, to corporate reporting behaviours such as earnings management and tax avoidance. Utilizing borough-level crime rates in London, we show that firms headquartered in boroughs with higher crime rates are more likely to engage in earnings management. We also find that firms in such boroughs exhibit lower levels of effective tax rates, evidencing aggressive tax avoidance. Our findings suggest that social capital plays a significant role in shaping corporate reporting.

Keywords: crime rates, social capital, financial reporting quality, tax avoidance

JEL Classification: A13, M41, H2