On Social Capital and Financial Reporting: Implications for Earnings Management and Accruals Perception

This dissertation consists of a pair of essays about the implications of social capital in the financial reporting environment. Social capital proxies for the inherent level of trust in the members of collaborative societies, and influences financial decisions (Jha and Chen 2015).

In the first essay, I explore the association between social capital and accruals earnings management. I find that absolute abnormal accruals and the propensity to meet or just beat earnings expectations are decreasing in social capital, while earnings are smoothed more as social capital increases. Social capital is negatively associated with positive (income-increasing) abnormal accruals and positively associated with negative (income-decreasing) abnormal accruals. I also find a negative association between real earnings management and social capital. Taken together, these results suggest that social capital curtails earnings management.

In the second essay, I explore the influence of social capital on the market consequences of reporting abnormal accruals. I find that as social capital increases, the market value for reporting excess cash decreases, as does the market value of reporting abnormal accruals. I find that abnormal accruals are priced lower as social capital increases, and that the cost of equity capital is higher when firms that have high social capital report abnormal accruals. Taken together, these results suggest that when managers do not conform to expected social norms, the market imposes more severe consequences.