Social Capital and Accounting Conservatism

42 Pages Posted: 30 Sep 2022 Last revised: 22 Jun 2023

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: June 22, 2023

Abstract

In this paper, we investigate the relationship between social capital and accounting conservatism. We measure social capital by the strength of civic norms and the density of social networks in a community and define accounting conservatism as earnings that reflect bad news more quickly than good news. We argue that firms headquartered in regions with stronger social capital have greater reputational concerns, face more social monitoring from stakeholders, and have better access to information and resources. These societal attributes discourage managers from delaying the recognition of bad news, resulting in higher accounting conservatism. Consistent with these arguments, we find that U.S. publicly listed firms located in counties with higher social capital display greater accounting conservatism. We also find that firms in high social capital regions prefer hiring managers with proven records of conservative accounting and that social capital reduces the asymmetric market reaction to bad versus good news disclosure. Our results are robust to using alternative measures of accounting conservatism and tests addressing endogeneity. Finally, using structural equation modeling (SEM), we show that accounting conservatism acts as a potential mechanism through which social capital reduces firms’ idiosyncratic risk.

Keywords: Social capital, accounting conservatism, firm risk

JEL Classification: M41, G32, Z13

Suggested Citation

Afzali, Mansoor and Colak, Gonul and Hasan, Iftekhar and Martikainen, Minna, Social Capital and Accounting Conservatism (June 22, 2023). 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
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Brighton, BN1 9SN
United Kingdom

Hanken School of Economics ( email )

P.O. Box 479
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Iftekhar Hasan

Fordham University ( email )

45 COLUMBUS AVENUE
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United States

Bank of Finland ( email )

P.O. Box 160
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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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