Essays on the Role of Social Networks and Social Capital in Accounting and Finance

Social capital, as an important construct in social sciences, captures shared common beliefs and density of associational networks within a community. Regions with high social capital tend to have higher levels of mutual trust and display greater contract enforceability through the power of the community. Sociologists argue that communities with dense associational networks face a harsher punishment for deviation from norms, which deters individuals from acting opportunistically. In the long run, this results in fostering a norm-conducive environment that encourages cooperation among individuals and mitigates norm-deviant behavior.

Research in economics and sociology shows that social capital brings several benefits to the community. For instance, regions with higher levels of social capital have effective governance mechanisms, higher economic growth, better health, lower income inequality, fewer suicides, higher education attainment ratios, and reduced levels of crime compared to regions with lower levels of social capital. Recently, researchers in corporate finance and accounting have also encompassed the idea of social capital and studied its influences in mitigating norm-deviant behavior by firms. For instance, researchers show that firms headquartered in high social capital counties have a lower tendency to avoid taxes, commit less financial reporting fraud, and use their resources more efficiently.

The first two essays of this dissertation contribute to this recent literature and extend it by studying how social capital influences corporate reporting culture and accounting conservatism, and proportion of female directors on corporate boards and corporate governance mechanisms. Using county-level data on social capital in the United States, the first essay illustrates that firms headquartered in high social capital counties have higher accounting conservatism as managers in such firms are less likely to withhold information in the form of bad news. The second essay studies how social capital influences boardroom gender diversity and corporate governance mechanisms. The findings indicate that social capital enhances oversight mechanisms and reduces inequality within a society, leading to lower supply-side barriers for female directors. This ultimately results in a higher proportion of female directors on corporate boards of firms located in high social capital.

Networks formed through social interactions and personal relationships are an important dimension of social capital and vital in almost all economic activities. The third essay relates to the role of social networks in disseminating information to the market. The findings of this essay suggest that insiders with larger networks are more likely to have access to channels of information and resource exchange, which ultimately result in a higher market reaction to their insider trades.

This dissertation contributes to the existing literature on two important social constructs – social networks and social capital – and their influence on different processes in accounting and finance through three distinct but related essays. The main contribution of the whole dissertation is the empirical evidence on how social networks influence insider trading and how social capital affects corporate governance and accounting conservatism.