The impact of social capital on real earnings management

Xiaojun Lin, Xunzhuo Xi, Yu Hu and Feng Tang

Asian Review of Accounting, 2025, vol. 33, issue 5, 789-815

Abstract: PurposeThis study aims to explore the relationship between social capital and real earnings management (REM).Design/methodology/approachUsing the social capital index from 1990 to 2014, this study investigates whether managers are less likely to carry out real earnings management when firms headquartered in a county with greater social capital and whether this impact will differ according to firm characteristics and the external environment.FindingsSocial capital is negatively linked to a firm’s REM, as a manager’s mindset toward misconduct might be more constrained by a better social environment and a lower tendency to undertake real earnings manipulation. Furthermore, we find that the effect of social capital on real earnings management is stronger for firms with geographically concentrated structures, weaker external monitoring, Sarbanes-Oxley Act adoption and greater pressure to meet earnings targets.Originality/valueThis study sheds light on the relation between social capital and accounting decisions by exploring whether social capital can influence real earnings management and provides evidence that social capital has a beneficial impact on reducing certain misbehaviors in financial reporting and that the effect is stronger when a firm has a geographically concentrated structure, weaker external monitoring, SOX adoption and less pressure to meet earnings targets.

Keywords: Social capital; Real earnings management; Financial information; Social economics (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:arapps:ara-03-2024-0082

DOI: 10.1108/ARA-03-2024-0082

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