The Local Spillover Effect of Corporate Accounting Misconduct: Evidence from City Crime Rates

Abstract

This study documents a spillover effect of accounting fraud by showing that after the revelation of accounting misconduct, there is an increase in financially motivated neighborhood crime (robberies, thefts, etc.) in the cities where these misconduct firms are located. We find that more visible accounting frauds (e.g., greater media attention and larger stock price declines) are more strongly associated with a future increase in financially motivated neighborhood crime. Further, we predict that adverse shocks stemming from the fraud put pressure on local communities leading to greater incentives and rationalization for individuals to commit financially motivated crime. Consistent with our predictions, we find that the association between fraud revelation and increased future financially motivated crime is strongest when local city-wide unemployment increases, where local job markets are shallower, and where local income inequality is high.

Keywords: accounting misconduct; crime rate; corporate spillovers; income inequality

JEL Classification: E24; M40; M41; M51