Culture of Weak Compliance and Financial Reporting Risk

Using one of the most comprehensive datasets on corporate noncompliance assembled, covering 22,885 firm years for 1994-2011 and 22% of Compustat, we examine the association between a firm’s culture of noncompliance and financial misreporting risk. We use a firm’s violations over a wide range of activities spanning product safety, anti-trust issues, worker safety, worker civil rights and environmental policies to construct a measure of noncompliance culture. We find a statistical and economically significant association between a noncompliance culture and a firm’s proclivity to misreport its financial statements. The results are robust to different measures of financial misreporting and to controls for executive compensation, corporate governance, a measure of internal control weakness, as well as industry noncompliance culture and CEO fixed effects.

Keywords: culture, misreporting

Suggested Citation: Suggested Citation

Kedia, Simi and Luo, Shuqing and Rajgopal, Shivaram, Culture of Weak Compliance and Financial Reporting Risk (December 16, 2015). Available at SSRN: https://ssrn.com/abstract=2716557

Simi Kedia

Rutgers Business School ( email )

117 Levin
94 Rockafellar Road
Piscataway, NJ
United States
8484454195 (Phone)

Shuqing Luo (Contact Author)

University of Hong Kong ( email )

1216 K. K. Leung Building
Hong Kong, 119245
Hong Kong
852-39171533 (Phone)

Shivaram Rajgopal

Columbia University - Columbia Business School, Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States