Management Accounting Research 46 (2020) 100640

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Management Accounting Research

journal homepage: www.elsevier.com/locate/mar

Does community social capital affect asymmetric cost behaviour?☆ T

a, b a
Sven Hartlieb ⁎, Thomas R. Loy , Brigitte Eierle
a
University of Bamberg, Germany
b
University of Bayreuth, Germany

ARTICLE INFO ABSTRACT

JEL classification: In this study, we examine the impact of community social capital on asymmetric cost behaviour. Community
A13 social capital captures the strength of social norms and the density of social networks in a region. As such, it is a
M14 socio-economic factor that might affect managerial resource adjustment decisions via different channels. We find
M40 that firms headquartered in U.S. counties with high social capital exhibit significantly less asymmetry in cost
M41
behaviour. Community social capital restrains managers from taking opportunistic resource adjustment deci-
Keywords: sions that would induce cost stickiness. This is in line with our additional finding, that cooperative norms acting
Cost behaviour in an ethical manner are the dominant channel for our setting, by which community social capital affects cost
Cost stickiness
behaviour. Our results corroborate the important role of managerial discretion in cost behaviour and make a
Social capital
significant contribution in understanding how local environmental factors explain differences in firms’ sticky
Norms
Managerial opportunism cost behaviour.

1. Introduction 1988), political science (e.g., Woolcook, 2010), as well as economics

A growing body of academic literature documents that corporate
and managerial decisions do not emerge in a societal vacuum, but that
they are influenced by the social environment (Nahapiet and Ghoshal,
1998; Droege and Hoobler, 2003; Hasan et al., 2017a,b). In this study,
we examine the effect of social environmental factors on asymmetric
cost behaviour (also referred to as cost stickiness), a well-documented
result of managerial discretion in the development of corporate cost
compared with changes in a firm’s activity.
We consider social environmental factors by adopting the commu-
nity social capital concept, which is defined as the strength of co-
operative norms and the density of networks in a region (e.g., Putnam,
1995). Cooperative norms are social norms that prevent individuals
from acting opportunistically. Dense social networks facilitate social
interactions and increase the level of social punishment for mis-
behaviour associated with the cooperative norms’ prescribed values
(Coleman, 1988). Accordingly, community social capital is a socio-
economic concept based on an idea that the level of opportunism, social
interaction or trust in others can vary across different regions within a
larger cultural framework (Coleman, 1988; Portes, 1998). As such, it
has been the subject of extensive research in sociology (e.g., Coleman,
(e.g., Guiso et al., 2004) and “offers enormous potential for better un-
derstanding multilevel management and organizational phenomena”
(Payne et al., 2011, 492).
Cost stickiness describes the phenomenon that managers react
quickly by expanding resources when sales are increasing, but are re-
luctant to reduce redundant capacity when demand is decreasing.
Hence, in general terms, costs increase more than they decrease for an
equivalent change in firm activity. Accounting literature reveals con-
siderable interest in understanding the determinants and differences in
the levels of cost asymmetry. The vast majority of research studies in
this area focus on firm-level determinants. In particular, adjustment
costs (e.g., Anderson et al., 2003), managerial optimism (e.g., Banker
et al., 2014) and opportunistic managerial motives (Chen et al., 2012)
have been identified as the key drivers of asymmetric cost behaviour.
Contemporary research is beginning to focus on country-level de-
terminants. For example, Banker et al. (2013) find that formal institu-
tional settings, such as employment protection laws, have an impact on
cost behaviour. Kitching et al. (2016) are the first to consider informal
institutions and provide evidence for the effect of national culture on
managerial cost decisions.
We examine whether community social capital as an environmental

☆
Part of this research was conducted while Loy was affiliated with the University of Nebraska-Lincoln. We thank James N. Cannon, Henri Dekker (editor), Yue Li,
Raj Mashruwala (discussant), Joel Owens, Scott Seavey, Orestes Vlismas, two anonymous referees and seminar participants at the AAA 2018 MAS Midyear Meeting
and the 41st Annual Congress of the EAA for valuable comments and suggestions. All errors remain our own.
⁎
Corresponding author.
E-mail address: sven.hartlieb@uni-bamberg.de (S. Hartlieb).

https://doi.org/10.1016/j.mar.2019.02.002
Received 17 August 2017; Received in revised form 14 February 2019; Accepted 17 February 2019
Available online 09 April 2019
1044-5005/ © 2019 Elsevier Ltd. All rights reserved.
S. Hartlieb, et al. Management Accounting Research 46 (2020) 100640

factor affects cost behaviour. Social capital might affect cost behaviour resource adjustment choices.
via different channels. First, it limits opportunistic behaviour. This is in The remainder of this study is organised as follows. Section 2 pro-
line with contemporary literature which finds that managers of firms vides the theoretical background and hypotheses development. Section
headquartered in high social capital regions behave less opportunisti- 3 explains the research design and describes our sample. Section 4
cally by being less engaged in earnings management (Jha, 2017) or tax presents the main empirical results, which we critically discuss in
avoidance activities (Hasan et al., 2017a), but more committed with Section 5. Section 6 concludes.
regard to corporate social responsibility (Hoi et al., 2018). Since op-
portunistic managerial behaviour is a determinant of cost asymmetry,
2. Background and hypothesis development
we expect a negative relationship based on this argument. More spe-
cifically, community social capital restrains self-centred resource ad-
2.1. Asymmetric cost behaviour and managerial decisions
justment decisions by opportunistic managers, which in turn mitigates
cost stickiness.
One of cost accounting’s basic principles is the division into either
However, community social capital also increases the level of social
fixed or variable costs. Whereas fixed costs, at least in the short run,
interaction and mutual trust in a region. Stronger social ties between
remain stable, variable costs react to changes in firm activity. The
managers and their staff, together with altruistic managerial behaviour,
traditional model of cost behaviour assumes a symmetrical relationship
have a significant bearing on corporate employment decisions and
between variable costs and activity changes (e.g., Noreen, 1991). Thus,
employee turnover (Leana and van Buren, 1999; Droege and Hoobler,
managerial decisions do not play an important role in this traditional
2003). Consequently, social capital might increase adjustment costs,
view. However, a growing body of evidence contradicts this assump-
which would prevent managers from adapting capacity when demand is
tion. It is well-documented that managerial discretion can lead to
decreasing, resulting in greater cost stickiness. Furthermore, executives
asymmetric cost behaviour. Managers are quick to expand resources
in high social capital regions tend to be more optimistic (De Carolis and
when demand is increasing, but for a variety of reasons choose to ‘stick’
Saparito, 2006), which leads them to overestimate future demand and
with unutilised capacity when sales are decreasing. Consequently, costs
not adjust costs in line with contemporaneous activity. Based on these
increase more than they decrease for an equal change in activity
arguments, we predict a positive association between cost stickiness
(Anderson et al., 2003). This phenomenon has been labelled cost
and community social capital. In summary, we conjecture that com-
stickiness.
munity social capital, as an environmental factor, affects managerial
The drivers of asymmetric cost behaviour are manifold, but can be
cost behaviour choices, but opposing forces result in two competing
divided into three main categories (Banker et al., 2018). First, when
hypotheses.
sales decline, managers trade-off benefits and costs of adjusting or
To analyse the relation between community social capital and cost
holding unutilised resources – generally, the higher the adjustment
behaviour, we exploit variations in the level of social capital across
costs, the lower the willingness to cut costs and reduce capacity. La-
different U.S. regions by adopting an established social capital measure
bour-related aspects make up a major component of overall adjustment
at county-level from Rupasingha et al. (2006). Employing a sample of
costs, which include monetary factors such as severance payments for
52,870 firm-year observations across 776 U.S. counties, we find that
dismissed employees or integration costs such as training for those
community social capital has a significantly negative impact on asym-
newly hired. However, particularly in the long-term, managers also
metric cost behaviour. This is in line with our first prediction that social
consider non-pecuniary, indirect costs such as lower staff morale or the
capital seems to restrain managers from taking self-centred, opportu-
loss of reputation (Anderson et al., 2003).
nistic resource adjustment decisions that would induce cost stickiness.
Second, when weighing adjustments against holding costs, man-
The observation is also economically meaningful. Managers of firms
agers also consider their (subjective) estimation of future demand
located in high community social capital counties cut costs by 6.6
conditions. Thus, there is an increased likelihood that managers with
percentage points more than their counterparts in lowest social capital
greater optimism and confidence will overestimate future demand.
regions. The general cost stickiness level for firms headquartered in
They ‘sit out’ the – in their view – hopefully short-term downturn in
high social capital regions is 5.4 percentage points lower than that of
order to avoid additional costs of recovering the original capacity after
firms in low social capital regions. Indeed, firms located in high com-
downsizing (Chen et al., 2013; Banker et al., 2014).
munity social capital areas do not seem to exhibit any sticky cost be-
Third, self-interested managers might refrain from reducing idle
haviour.
capacity in periods of downturn for opportunistic reasons (Anderson
This main result is also consistent with our finding that social norms
et al., 2003). They take resource adjustment decisions driven by per-
prompting behaviour in a morally expected manner comprise the
sonal rather than economic motives. Chen et al. (2012) address these
dominant channel in our setting, by which social capital affects cost
agency conflicts and argue that managers seek to derive personal utility
behaviour. We further provide evidence that empire building incentives
from empire building. They have incentives to retain unused resources
exhibit a significant association with cost stickiness only in low social
due to the potential loss of status or even employment when downsizing
capital counties. Moreover, proxies for good governance, such as more
a division. Furthermore, managers act out of self-interest by avoiding
independent directors, also seem to have a significant impact on op-
the hard decision to cut slack resources when sales decrease, including
portunistic cost behaviour only in low social capital counties. In this
possibly the dismissal of familiar employees. (Anderson et al., 2003).1
regard, corporate governance and community social capital seem like
Prior literature suggests a trade-off between these personal motives and
substitutes for each other. Our results are further corroborated by
managerial incentives in earnings management, which corroborates the
several sensitivity tests. For instance, the results are generally un-
important role of managerial discretion and opportunism in cost be-
affected by different cost (sub-)categories and stable across geo-
haviour (Dierynck et al., 2012; Kama and Weiss, 2013; Hartlieb and
graphically (un-)diversified firms.
Loy, 2017). This is also consistent with prior findings that firms located
Our findings contribute to the literature on cost behaviour that
in the U.K. or U.S., which are subject to common-law governance sys-
examines differences in the degree of cost stickiness across firms by
tems with more rigorous external scrutiny, yield less sticky cost beha-
introducing a new concept, which combines sociological and manage-
vior than German or French firms in a code-law governance environ-
ment accounting research. Kitching et al. (2016) document that en-
ment (Calleja et al., 2006).
vironmental factors such as culture can affect cost behaviour decisions.
We provide evidence that the social environment and informal in-
stitutions at community level also affect cost behaviour. This con- 1
We thank an anonymous referee for pointing out that managers may take
tributes to understanding how social factors may influence managers’ more pride in building corporations than dismantling parts of the operation.

2
S. Hartlieb, et al.
2.2. What is community social capital?
Social scientists have developed various definitions for the concept
of (community) social capital.2 Putnam (1995, 67) offers a consensus
definition that synthesises different notions: “[S]ocial capital refers to
features of social organization such as networks, norms, and social trust
that facilitate coordination and cooperation for mutual benefit.”
Community social capital is not a form of capital owned by a firm
(such as physical investment) or by a manager (e.g., human capital or
education), but ‘belongs’ to the local community.3 It is only accessible
to members of the community through following the prevailing local
values and norms (Hoi et al., 2018). Thus, community social capital is
often considered to be a social, cooperative norm that makes people
within a society more obliged to behave ethically and morally. More
specifically, Fukuyama (2001, 7) defines social capital as “an in-
stantiated informal norm that promotes co-operation between two or
more individuals.” People internalise such cooperative norms over
generations and feel obligated to behave in a certain manner (Portes,
1998). In regions with strong cooperative norms, people share a set of
common beliefs which prevents individuals or organisations from
acting opportunistically; such behaviour would be considered contra-
dictory to the prescribed values associated with the norms to act in
accordance with collective interests (Coleman, 1988; Hoi et al., 2018;
Elster, 1989).
An alternative approach suggests viewing community social capital
as a strong set of networks. Following Nahapiet and Ghoshal (1998,
243), community social capital is “the sum of the actual and potential
resources embedded within, available through, and derived from the
network of relationships possessed by an individual or social unit.” As
such, community social capital creates mutual confidence and facil-
itates certain actions from individuals within these networks (Coleman,
1988, 1990). Strong social networks may also result in less opportu-
nistic behaviour since they enhance the level of social punishment for
misbehaviour in a society (Spagnolo, 1999; Guiso et al., 2004). Hence,
interdependencies exist between the concepts of norms and networks.
As they are not clearly separable, initially we do not make a distinction
between the two constructs, in line with previous literature (e.g., Guiso
et al., 2004; Hasan et al., 2017a; Jha, 2017).4
In summary, regions with a higher level of community social capital
exhibit dense networks and strong cooperative norms that induce mu-
tual trust and altruistic behaviour within a society. As such, community
social capital is an environmental, socio-economic construct that affects
individual as well as organisational behaviour. Consequently, this
concept has gained popularity in different research disciplines over
recent decades (Woolcook, 2010).5 For instance, prior research
2
Adler and Kwon (2002) provide a comprehensive overview of different
definitions in the social sciences literature.
3
One can think of community social capital as highly localised as on a
neighbourhood level. Homeowners in a community with high social capital feel
a greater responsibility and obligation to keep their homes and gardens in
pristine condition. While this increases the value of each individual home, the
true potential of community social capital unfolds by making the whole
neighbourhood a more attractive (and, thus, more expensive) place to live. On
the one hand, each homeowner has a stake in the social capital of the com-
munity and, on the other hand, homeowners who are not in compliance with
the community’s norms will probably be subject to social pressure. We ex-
plicitly thank an anonymous referee for pointing us toward this vivid example
which fully captures the essence of community social capital.
4
We will address the issue of a potential differentiation between norms and
networks through an additional analysis exploring which construct dominates
in our setting (cf., Section 5.1).
5
In the early 1980s, the term social capital was used in scholarly books
around hundred times a year. By 2008, this number had increased to ap-
proximately 16,000 (Woolcock, 2010). Most recently, more than 90,000 pub-
lications archived in Google Scholar mention the term social capital in their
title.
3
Management Accounting Research 46 (2020) 100640
documents that community social capital is positively correlated with
economic growth (Zak and Knack, 2001; Dincer and Uslaner, 2010), or
that it is associated with lower corruption (La Porta et al., 1997) and
less crime (Buonanno et al., 2009).
2.3. How community social capital might affect cost behaviour
There is sound evidence supporting a view that community social
capital might affect corporate, and particularly managerial, decisions.6
For instance, contemporary research finds that managers in high social
capital U.S. counties exhibit less opportunistic behaviour. This is in line
with theoretical considerations that strong cooperative norms restrain
narrow self-interest (e.g., Knack and Keefer, 1997) and dense social
networks heighten social sanctions for such opportunistic behaviour
(e.g., Coleman, 1988). Jha (2017) particularly documents that the
punishment for committing accounting fraud for CEOs is comparatively
harsher in high social capital regions. As a consequence, managers
behave less opportunistically and instead more cooperatively, owing to
social environmental pressure (Coleman, 1988). They are less involved
in earnings management (Jha, 2017) and tax avoidance activities
(Hasan et al., 2017a), but are more inclined to engage in corporate
social responsibility (Jha and Cox, 2015; Hoi et al., 2018). Based on less
self-centred managers with a greater willingness to cooperate, Jha and
Chen (2015) further suggest that there are less agency conflicts and
relatively lower audit fees for clients headquartered in high social ca-
pital counties.
Managers in high social capital regions, therefore, are more likely to
act in firms’ best interests; hence agency conflicts and opportunistic
behaviour should play less important roles for the cost behaviour of
companies located in these regions. When managers take resource ad-
justment decisions driven by opportunistic motives rather than eco-
nomic reasons, this leads to misallocation of capacity resources, which
might in turn have negative consequences for a firm’s future prospects.
Researchers have long recognised that inefficiencies in the allocation of
resources may stem from managers’ personal motives, including empire
building incentives to gain satisfaction from a greater sphere of influ-
ence or the personal costs of taking the hard decision to downsize, re-
sulting in a lower investor value (Hope and Thomas, 2008). The com-
munity certainly benefits from managers who are more responsible and
do not destroy firm value through ineffective capacity adjustment de-
cisions. For example, this applies to local investors, lenders or em-
ployees who are interested in whether a company is managed re-
sponsibly.7 Given that firms also significantly contribute to local tax
revenues, the community in general benefits from responsibly acting
managers (Hasan et al., 2017a). It is, therefore, a common belief among
society that those with power such as business managers have a civic
duty to act responsibly in the interests of the social community (Wood,
1991). In high social capital communities, dense social networks and
strong social norms emphasise civic duty and socially cooperative be-
haviour. Hence, managers are less likely to act opportunistically so as to
meet the community’s prescribed values and thus avoid social punish-
ment. However, managers in high social capital regions also display a
greater sense of social conscience even when their actual behaviour is
unobserved by the community (Elster, 1989).
Summarised, resource adjustment decisions of managers from firms
located in high social capital regions are less likely to be driven by
personal motives that might induce cost asymmetry as described by
Anderson et al. (2003) and documented by Chen et al. (2012).
6
Payne et al. (2011) offer an extensive literature review which deals with the
impact of social capital on managerial behaviour.
7
Much contemporary research shows that the phenomenon commonly re-
ferred to as “home equity bias” is even more localised than previously de-
termined (e.g., Brown et al., 2015; Chi and Shantikumar, 2017). Accordingly,
local managerial behaviour is deeply crucial for the local community.
S. Hartlieb, et al.
Following this line of reasoning, we conjecture that community social
capital is negatively associated with cost stickiness:
H1. Community social capital constrains managers’ opportunistic
motives for asymmetric cost behaviour, i.e., social capital mitigates
cost stickiness.
It is also well-documented that stronger sets of networks impact
corporate employment practices and staff turnover. Employees in high
social capital regions with dense social networks feel more disposed to
interact socially, which encourages commitment to the organisation
and cooperation in the workplace (Spagnolo, 1999). Moreover, man-
agers have more confidence in their staff and invest more heavily in
training, collaborative work and learning, resulting in strong social ties
and more stable employment relationships (Leana and van Buren, 1999;
Droege and Hoobler, 2003). Additionally, managers behave internally
more altruistically because of stronger cooperative norms, or externally
because they are driven by the fear of social punishment from social
networks, which makes them more reluctant to dismiss familiar em-
ployees and reduce capacity in periods of downturn. Communities
scrutinise the actions of companies and managers as members of society
to judge whether they are acting in ways considered to be consistent
with extant norms and values. Playing the ‘hire and fire’ game to adapt
capacity to a firm’s activity level would not be compatible with such
values as downsizing imposes costs on the community, including un-
employment insurance, lost wages or lost tax revenues (van Buren,
2000). In short, community social capital contributes to stable em-
ployment relationships, which heighten adjustment costs suggesting a
positive relationship between social capital and the degree of asym-
metric cost behaviour.
Entrepreneurial science literature additionally suggests that man-
agers in high social capital regions are more innovative and less risk-
averse (Westlund and Bolton, 2003; De Carolis and Saparito, 2006).
This is in line with the spirit of Uslaner (2002) who suggests that
trusting people, especially in communities with dense social networks
and greater social cohesion, are more optimistic and self-confident.
They are more inclined to participate in social life and trust others in
their social environment, despite the risk that these people could take
advantage of such behaviour (Doney et al., 1998), thought to be both
optimistic and risk-taking. Hence, it is more likely that managers in
high social capital regions will expect a period of downturn to be rather
temporary and are more convinced of their ability to lead the organi-
sation into better times successfully, without adapting capacity. Thus,
this dimension of social capital might again positively affect the level of
cost asymmetry. Taken together, we state our second, alternative hy-
pothesis as follows:
H2. Community social capital leads to strong social ties between
managers and employees and increases managerial optimism, i.e.,
social capital increases cost stickiness.
Kitching et al. (2016) document that environmental factors can af-
fect cost behaviour. They find that different dimensions of national
culture influence the degree of cost stickiness. We conjecture that local
social capital, as an informal institution and socio-economic, environ-
mental factor, plays an important role in determining managerial cost
behaviour decisions over and above national culture. Thus, we con-
tribute to the literature by explaining differences in the degree of cost
asymmetry. However, our theoretical discussion is inconclusive about
the net impact of social capital on cost stickiness (Fig. 1 summarises our
three lines of argument). Accordingly, we formulate two competing
hypotheses, which we will examine in what follows.
3. Research method and sample
3.1. Measurement of community social capital
Consistent with a lack of consensus on how to define the term social
4
Management Accounting Research 46 (2020) 100640
capital, its measurement has also created considerable controversy in
social sciences literature (Putnam, 2001; Rupasingha et al., 2006). For
example, researchers have used crime rates, voter turnout, volunteering
or charitable-giving as proxies for the level of social capital
(Rupasingha et al., 2006). In recent years, there has been consensus in
accounting and corporate social responsibility literature (e.g., Jha,
2017; Hasan et al., 2017a,b; Hoi et al., 2018) on the construction of an
aggregate social capital index following the approach of Rupasingha
et al. (2006), based on data provided by the Northeast Regional Center
for Rural Development (NRCRD) at Pennsylvania State University.8
NRCRD provides data on voter turnout in presidential elections (pvote),
response rates in U.S. census surveys (respn) as well as the number of
non-profit (nccs) and varied social organisations (assn) such as civic and
social associations, business associations, sport clubs or religious and
political organisations for all U.S. counties in the years 1990, 1997,
2005, 2009 and 2014. The major benefit of this index is that it re-
presents both the strength of norms and density of networks for many
U.S. counties, which in turn makes it suitable for our analysis.
The underlying idea is that there are no legal obligations to vote or
participate in census surveys. Thus, higher participation rates represent
stronger cooperative norms within a community, thereby inducing
people to act in a morally expected manner and fulfil their obligations
within society (Knack, 1992). The number of non-profit and social or-
ganisations reflects the strength of networks within a community. The
higher the associational density in a county, the more likely it is that
people will interact socially across different networks resulting in
stronger social ties. This environment fosters trust and cooperation,
beyond mere compliance with formal institutions (e.g., law enforce-
ment), and is conducive to a corresponding social, cooperative norm
within the network (Coleman, 1988, 1990). A county-level approach is
appropriate since the social capital concept’s inherent assumption is
that it facilitates collective action, which is primarily found at local
organisation rather than national level (Rupasingha et al., 2006).
We follow Rupasingha et al. (2006) and conduct a principal com-
ponent analysis based on the four aforementioned variables (pvote,
respn, nccs and assn). We extract the first component to construct the
social capital index for each U.S. county for the years 1990, 1997, 2005,
2009 and 2014.9 We then linearly interpolate the data to fill in missing
values for the in-between years. In line with prior research, we assume a
constant rate of change between the five measurement points (e.g.
Hasan et al., 2017a; Jha and Chen, 2015; Hilary and Hui, 2009). The
Pearson correlation between the social capital index from the years
1990 and 2014 is 0.65, which is in line with the idea that social capital
is relatively constant over time (Anheier et al., 1995). Finally, we
standardise the variable to rule out potential problems with inter-
preting the three-way interaction term in model (2), which we present
in the following section.10 Our computed social capital index is very
similar to that directly reported by NRCRD (Pearson correlation: 0.99).
3.2. Empirical model
In order to measure the effect of community social capital on cost
behaviour, we adopt the cross-sectional model introduced by Anderson
8
Data and descriptions for the social capital index are publicly available:
http://aese.psu.edu/nercrd/community/social-capital-resources.
9
The eigenvalues of the first component for the years 1990, 1997, 2005, 2009
and 2014 are 1.96, 2.06, 1.94, 1.81 and 1.60, respectively. Concerning the
other components, all eigenvalues are generally below one (only for 2009 and
2014 the eigenvalues of the second component are 1.04 and 1.10). Appendix B
comprehensively describes the data and the data generation procedure.
10
Without the standardisation, both lnSales and Social _Capital could exhibit
negative values, which would make it hard to interpret the coefficient of in-
terest 3 . Alternatively, we use the rank of our social capital measure (in dec-
iles) instead of absolute values, which does not significantly change our results
[untabulated].
S. Hartlieb, et al.
Fig. 1. Expected Effect of Community Social Capital on Cost Stickiness.
et al. (2003), on which most of the cost stickiness-related literature
builds (e.g., Chen et al., 2012; Banker et al., 2013; Kitching et al.,
2016). The model empirically analyses the relationship between
changes in costs and simultaneous changes in sales, as follows:
lnO Cn, i, t = 0 + 1 lnSalesn, i, t + 2 Decn, i, t × lnSalesn, i, t +
where ln OCn, i, t denotes the log-change in operating costs (OC) for
firm i in county n in year t. ln Salesn, i, t is the log-change in sales
revenues approximating the firm’s activity level and Decn, i, t is an in-
dicator variable that equals 1 if sales decrease between two fiscal years,
and 0 otherwise.11 We prefer OC over other measures of cost stickiness
for three reasons. First, OC captures the broadest extent of cost man-
agement decisions. It is not subject to managers discretionarily classi-
fying costs as selling, general and administrative (SGA) or costs of goods
sold (COGS), attributable to a lack of authoritative guidance
(Subramaniam and Weidenmier Watson, 2016). This behaviour is
sometimes also referred to as the “SG&A shell game” (White and
Dieckman, 2005, 20). Second, and on a related note, many of the ar-
guments laid out before are associated with labour expenses which are
a major component of both SGA and COGS (e.g., Rouxelin et al., 2018).
Finally, only OC allows for similar research questions to be tested and
replicated internationally.12
We specify this basic model (1) following prior research (e.g.,
Dierynck et al., 2012; Kitching et al., 2016). Primarily, we include our
11
Applying ratios and log-specifications enhances the comparability across
firms and moderates potential heteroscedasticity (Anderson et al., 2003). Fur-
thermore, log-specifications enable easy interpretation of coefficient values as
percentage changes in operating costs and sales. The coefficient 1 consequently
measures the average percentage growth in operating costs when sales increase
by 1% and the sum of 1 and 2 the average percentage decline for a 1% de-
crease in sales. Accordingly, if 2 is significantly negative it indicates asym-
metric cost behaviour, given a positive value for 1.
12
For instance, Banker et al. (2013) as well as Calleja et al. (2006) also
employ OC as other cost categories are covered less broadly in international
databases (cf., Günther et al. (2014) for a review of the (cross-country) litera-
ture).
Management Accounting Research 46 (2020) 100640
social capital index, which captures the social capital level of a county
where the firm is headquartered, as two and three-way interaction
terms with the natural log of changes in sales and the sales decrease
indicator. The three-way interaction term captures the extent to which
social capital impacts asymmetric cost behaviour.
n, i, t We further include several controls that might also have an impact
(1) on the degree of cost asymmetry.13 First, we add firm-level controls
which have been identified as determinants of cost behaviour (e.g.,
Anderson et al., 2003; Calleja et al., 2006). Asset ( AI ) and employee
intensity (EI ) crucially determine adjustment costs and are thus ex-
pected to induce sticky cost behaviour. Successive decrease (Succ _Dec )
controls for managers’ perceptions, since executives are more likely to
consider negative demand shocks as more permanent after two con-
secutive downturns, which mitigates cost stickiness (Banker et al.,
2014). Furthermore, we control for managers’ opportunistic motives
that might induce cost stickiness. Following Chen et al. (2012), we
consider free cash flow (FCF ) as a common proxy for agency problems
and empire building incentives. When FCF is high, managers have
more opportunities for empire building, resulting in greater cost
asymmetry.14 Second, we include various county or state controls to
ensure that we do indeed capture the effect of social capital and not
other region-specific factors. As such, we incorporate the (per capita)
real GDP growth rate (GDP _Growth ) for each U.S. state, since we expect
to find that managers in states with a growing macroeconomic en-
vironment are more optimistic, which would foster cost stickiness
(Dierynck et al., 2012). Next, we consider three variables that represent
the labour market and might thus significantly affect adjustment costs
in a region. The first is a measure for state-level union membership
(Union _Mem ). Banker et al. (2013) find that stricter employment pro-
tection laws positively affect the degree of cost stickiness. Similarly,
13
All variables are defined in Appendix A.
14
Chen et al. (2012) employ additional proxies for empire building incentives
such as manager tenure or horizon. However, these variables require the use of
the database Execucomp, which would significantly reduce our sample size and
the number of counties included in our sample. To ensure that our main results
represent the greatest possible portion of the U.S., we will consider these
variables in an additional test in Section 5.4.
5
S. Hartlieb, et al.
stronger trade unions and, as a result, increased employee bargaining
power should constrain managers from firing workers during periods of
downturn. Additionally, we employ variables for the unemployment
rate (Unemployment ) and education level (Education ) in a U.S. county.
The higher the amount and quality of available labour, i.e. the labour
pool, the lower adjustment costs should be. We further control for re-
ligious adherence (Reli ), since such norms can also constrain (man-
agerial) opportunism and expect a negative effect on sticky cost beha-
viour (McGuire et al., 2012). In line with prior literature (Jha and Chen,
2015; Hasan et al., 2017a; Jha, 2017), we also include controls for the
county’s income per capita (Income _Capita ), population density (Rural )
and overall population (Population ). We do not make predictions for
these variables since their relation to cost behaviour is not obvious.
Finally, we include county, industry (based on Fama and French’s 48-
digit classification) as well as year fixed-effects to control for potential
unobserved factors. We cluster standard errors at the firm-level. Our
main empirical model is as follows:
ln OCn, i, t= 0 + 1 lnSales n, i, t + 2 Decn, i , t × lnSales n, i, t
+ ( 3 Social_Capital n, t + 4 AIi,n, t + 5 EIi, n, t + 6 Succ_Dec i, n, t
+ 7 FCFi, n, t + 8 GDP _Gr owthn, t + 9 Union _Memn, t
+ 10 Unemploymentn, t + 11 Income _Capitan, t + 12 Educationn, t
+ 13 Relin, t + 14 Ruraln, t + 15 Populationn, t )
× Decn, i , t × lnSalesn, i, t
+ ( 16 Social _Capitaln, t + 17 AIi, n, t + 18 EIi, n, t + 19 FCFi,n, t
+ 20 GDP _Growthn, t + 21 Union _Memn, t + 22 Unemploymentn, t
+ 23 Educationn, t + 24 Relin, t + 25 Income _Capitan, t
+ 26 Ruraln, t + 27 Populationn, t )
× lnSalesn, i, t
+ county _fe + industry _fe + year _fe +
n, i, t
(2)
Our main coefficient of interest is 3 , which captures the relation
between community social capital and the level of asymmetric cost
behaviour. A significantly positive coefficient would imply that com-
munity social capital mitigates cost stickiness, in line with H1, while a
negative coefficient would provide evidence for the competing hy-
pothesis H2 that community social capital contributes to cost asym-
metry.
3.3. Sample selection and characteristics
We use data for publicly listed firms located in the U.S. from
Compustat North America (NA). Our sample spans the period from
1990 to 2014, as we can obtain community social capital values only
for these years.15 We exclude financial firms and public utilities (SIC
6000–6999 and 4900–4999) since their financial statements are in-
compatible with those of other firms and they are subject to much more
extensive regulation. The resulting initial sample comprises 165,995
firm-year observations.
Our sample construction procedures largely follow Anderson et al.
(2003) and subsequent research (e.g., Calleja et al., 2006; Chen et al.,
2012; Dierynck et al., 2012). We require operating costs and sales to be
available in the current or previous year; additionally, operating costs
are to be less than sales (Calleja et al., 2006). Furthermore, we delete
observations with changes in costs or sales in the top and bottom 0.5
percent of the distribution in order to control for outliers (e.g., Chen
et al., 2012). We also exclude all observations where costs and sales
move in opposite directions, as suggested by Anderson and Lanen
(2009). Then we remove all firms located in counties for which social
capital data is not available. Finally, we exclude all firm-year
15
Because we require sales data to be available for two prior years for our
control variable Succ _Dec , we additionally refer to the years 1988 and 1989
which we lose afterwards. For the final sample, there is no significant clustering
of observations around any specific sample year.
6
Management Accounting Research 46 (2020) 100640
observations with missing values for the control variables. The re-
maining 52,870 observations constitute our final sample comprising
7,766 firms from 776 counties. Table 1 (Panel A) summarises sample
selection.
Table 1 also documents our final sample’s different characteristics.
Panel B presents the industry distribution, summarised by Fama and
French’s 12-industry classification. We note that business equipment,
manufacturing and shops are the most highly represented industries,
which is in line with the original Compustat NA pattern. In Panel C, we
summarise the geographical distribution. Based on the U.S. census
classification, we differentiate between nine geographical divisions.
Our sample comprises firms from each division and the distribution
suggests that we have a balanced sample without any region being
significantly under- or overrepresented. Fig. 2 corroborates this ob-
servation. It visualises the geographical distribution at county-level and
shows that our 776 counties are spread out across the entire U.S.
4. Empirical results
4.1. Descriptive statistics
Fig. 2 also gives some insights into the variation of social capital at
county-level. It shows that counties with a higher level of social capital
are concentrated mainly in the North, whereas Southern counties ex-
hibit relatively lower social capital.16 In Table 2 (Panel A), we present
additional descriptive statistics for our main variables. The standard
deviation of Social _Capital is 0.11 whilst the inter-quartile spread
ranges from 0.26 to 0.42, indicating significant variation in the level of
social capital among our sample counties. The three counties with the
highest social capital in our sample are Nicollet, MN, Martin, MN and
Garden, NE. The counties with the lowest level are Bronx, NY, Queens,
NY and El Paso, TX.
On average, firms in our sample have $2723 million (median: $389
million) in annual sales revenue and $2320 million (median: $325
million) in operating costs. Corresponding to a mean (median) ln Sale
and a mean (median) ln OC of 0.10 (0.09) for both cases, operating
costs as well as sales revenues are, on average, increasing in our sample.
For 22 percent of our observations, we identify a decrease in sales be-
tween two fiscal years, which is generally in line with prior cost
stickiness-related research (e.g., Anderson et al., 2003; Kama and
Weiss, 2013). We find that the average unemployment rate in our
counties is 6.21 percent, the average percentage of religious adherence
is 0.53 and the mean personal income per capita is $39.39 thousand.
Furthermore, 0.32 as a mean level of Education denotes that, on
average, 32 percent of the counties' inhabitants aged 25 years and older
hold at least a bachelor’s degree whilst 0.14 as a mean value of
Union _Mem implies that, on average, 14 percent of the counties’ labour
force are union members.
Table 2 (Panel B) summarises correlations among the independent
variables, with the majority being significant but small. We report only
two above 0.5 or below −0.5 (between Education and Income _Capita
(0.66) as well as Population and Rural (-0.56)) so that multicollinearity
should not be a major concern.17 Social _Capital is positively and sig-
nificantly correlated with the majority of county controls. It tends to be
higher in counties with higher religious adherence, higher income per
16
This pattern is consistent with the variance presented in the maps of
NRCRD. The maps for all the measurement points are available here: http://
aese.psu.edu/nercrd/community/social-capital-resources/us-maps-showing-
county-social-capital-levels.
17
In all regression models, we conduct diagnostic tests for multicollinearity.
We find that variance inflation factors (VIF) are generally below the critical
level of ten. As an additional test, we follow Chen et al. (2012) to re-run the
regressions with continuous variables that are mean-centred in order to miti-
gate multicollinearity (Aiken and West, 1991). Our results remain robust to this
alteration and all resulting VIFs are below five [untabulated].
S. Hartlieb, et al. Management Accounting Research 46 (2020) 100640

Table 1
Sample Statistics.
Panel A: Sample Selection

Firm-Years Firms Counties

All observations in the period 1988–2014 excluding financial firms and public utilities 165,995 16,146 993
Data available for sales and costs in current or previous year 159,703 16,146 993
Requirement that operating costs are less than sales 110,571 14,131 956
Trim top and bottom (0.5 percent level) of changes in sales and costs 109,525 14,131 956
Exclude observations where sales and costs move in opposite directions 102,824 14,131 956
Data available for the community social capital index 90,145 12,841 915
Final Sample: Data available for calculating other model variables 52,870 7,766 776

Panel B: Industry Distribution

Industry Freq. %

Consumer NonDurables 4,119 7.79

Consumer Durables 1,875 3.55
Manufacturing 8,660 16.37
Energy 2,293 4.34
Chemicals 1,875 3.55
Business Equipment 10,456 19.77
Telecommunication 1,938 3.67
Shops 9,166 17.34
Healthcare 4,550 8.61
Other 7,938 15.01
Total 52,870 100.00

Panel C: Geographical Distribution

Division Freq. %

New England 4,543 8.59

Middle Atlantic 8,648 16.35
East North Central 7,836 14.82
West North Central 4,046 7.65
South Atlantic 8,078 15.28
East South Central 1,823 3.45
West South Central 6,850 12.96
Mountain 2,943 5.57
Pacific 8,103 15.33
Total 52,870 100.00

capita as well as higher education levels and lower in counties with a
higher unemployment rate and large populations. Furthermore, coun-
ties with a higher level of community social capital exhibit significantly
increased unionisation. People in high social capital counties are see-
mingly more inclined to interact socially and be actively engaged in
trade unions. This is reasonable since our community social capital
measure also captures the number of labour organisations.18
4.2. Main results
In Table 3, we present the regression output for our main model
(2).19 The key coefficient of interest is 3 on the three-way interaction
term Social _Capital × Dec × ln Sales . It measures to what extent
asymmetric cost behaviour is influenced by community social capital.
We find a positive coefficient for this term, highly significant at the 0.01
level (t=3.08). This implies that managers of firms located in high
social capital regions are more likely to cut costs proportionally to sales
in periods of downturn. As this mitigates cost stickiness, it lends support
to our prediction in H1. Thus, less opportunistic managers who refrain
18
See Appendix B. To address this potential endogeneity concern, we will
later repeat our analysis, removing the number of labour organisations from the
computation of our measure.
19
The adjusted R² amounts to 93.31%, which is rather high. Nevertheless,
this finding is consistent with prior studies employing similar sample selection
and methodological choices (e.g., Calleja et al., 2006). It implies that changes in
operating costs are extensively explained by changes in sales.
from retaining excess capacity for personal reasons, due to stronger
cooperative norms or greater social punishment within the societal
network, seem to demonstrate the dominant effect of how social capital
affects cost behaviour.
Regarding our control variables, the results are generally in line
with prior literature, but we also find some inconsistencies with our
expectations. Asset and employee intensities are included as proxies for
adjustment costs (Anderson et al., 2003). Consequently, both variables
significantly promote sticky cost behaviour. The coefficient for
Succ _Dec is positive and significant, which is also consistent with our
prediction and prior literature (Anderson et al., 2003). Furthermore,
FCF exhibits a significantly negative coefficient, in line with the ar-
gument that managers in firms with high FCF have more empire
building incentives, which in turn induce cost asymmetry (Chen et al.,
2012). With respect to county and state-level controls, only the coef-
ficient on GDP _Growth is significantly positive. This is contrary to our
expectation that managers in U.S. states with economic growth are
more optimistic and thus less willing to cut costs during a downturn.
The remaining coefficients on county and state-level controls are sta-
tistically insignificant. The coefficient on Union _Mem contradicts our
expectation that stronger unions make it more difficult for managers to
adjust labour resources in periods of downturn. The original intuition
followed Banker et al. (2013) who find that stronger legal employment
protection laws positively affect cost asymmetry.20 Since the coefficient
20
As an additional robustness test, we follow the sample selection process of
Banker et al. (2013) in Section 4.3. For this sample,Union _Mem exhibits the

7
S. Hartlieb, et al.
Fig. 2. Distribution (quartiles) of average social capital by county. Higher (darker) values denote higher community social capital.
on religious adherence is also statistically insignificant, social norms
apparently have a greater impact on managerial resource adjustment
decisions than religious norms.
While the results reported in Table 3 indicate a statistically sig-
nificant relationship between community social capital and cost beha-
viour, they do not allow inferences to be drawn about the economic
significance of community social capital for cost behaviour. This raises
the question of whether there actually is a noticeable difference in the
degree of cost stickiness between firms located in high and low social
capital counties. To address this issue, we follow Kama and Weiss
(2013), conducting a subsample analysis based on our basic model (1).
We identify counties with the highest (upper quartile) and lowest
(lower quartile) levels of social capital. This implicitly assumes that the
interquartile range is a ‘grey area’ in terms of community social ca-
pital.21 Then, we run the basic model (1) for both subsamples in order
to compare the degree of cost stickiness. The results are reported in
Table 4.
The cost stickiness coefficient 2 is negative and highly significant at
the 1% level for the low social capital subsample (t=-4.40), indicating
that these firms are, on average, subject to sticky cost behaviour.
However, for firms located in a high social capital county, the coeffi-
cient is insignificantly different from zero, implying no evidence for
(footnote continued)
expected negative sign, but it is still insignificant (t=-1.60). This is in line with
the results of Banker et al. (2013) who find a positive effect for employment
protection laws, but an insignificant coefficient for union density.
21
When we employ a median split, the main inferences hold. The coefficient
2 is negative and significant for both subsamples (high: -0.025; low: -0.051),
but again significantly higher for the low community social capital sample
(t=1.91). The difference in the slope for sales decreases ( 1 + 2 ) is again
significant (t=3.09).
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Management Accounting Research 46 (2020) 100640
asymmetric cost behaviour (t=-0.77). The coefficient 2 for firms in a
low social capital county is 0.054 greater (in absolute terms) than that
of firms in a high social capital county, statistically significant at the 1%
level (t=2.90). In other words, the cost stickiness level for firms located
in high social capital counties is 5.4 percentage points lower than that
of firms headquartered in the lowest social capital counties. The extent
of the slope for sales decreases ( 1 + 2 ) shows how intensely managers
react to negative changes in the activity level with respect to their cost
decisions. The slope for sales decreases for the high social capital
sample (0.947) exceeds that for the low social capital sample (0.881),
again significant at the 1% level (t=4.22). Accordingly, for a 1 percent
decrease in sales, managers of firms located in high social capital
counties cut costs by 6.6 percentage points more than their counterparts
in low social capital regions; hence, opportunistic motives for empire
building incentives or the anguish of taking hard downsizing decisions
seem to play less important roles for those managers. Thus, in addition
to being statistically significant, the association between community
social capital and cost stickiness is also economically meaningful.
4.3. Sensitivity tests
We perform several analyses to test the robustness of our main re-
sults. We follow an alternative sample selection procedure (Column 1),
slightly modify our original sample selection process (Column 2 and 3),
exclude counties that represent a disproportionally high or low number
of observations (Column 4), modify our community social capital
measure (Column 5) and use an alternative proxy for community social
capital (Column 6). Table 5 provides an overview of the robustness tests
undertaken and summarises the pertinent results. Our main conclusion
that social capital mitigates cost stickiness continues to hold for all
modifications.
S. Hartlieb, et al. Management Accounting Research 46 (2020) 100640

Table 2
Descriptive Statistics.
Panel A: Distributional Properties

Variables Mean SD P1 P25 P50 P75 P99

lnOC 0.10 0.21 −0.39 0.02 0.09 0.20 0.80

lnSales 0.10 0.21 −0.41 0.02 0.09 0.20 0.81
Dec 0.22 0.41 0.00 0.00 0.00 0.00 1.00
Social _Capital 0.35 0.11 0.14 0.26 0.35 0.42 0.63
AI −0.98 0.64 −2.80 −1.34 −0.97 −0.60 0.54
EI 1.65 0.90 −0.92 1.17 1.69 2.16 3.78
Succ _Dec 0.08 0.27 0.00 0.00 0.00 0.00 1.00
FCF 0.09 0.09 −0.15 0.04 0.08 0.13 0.32
GDP _Growth 1.61 2.34 −5.00 0.20 1.70 3.10 6.20
Union _Mem 0.14 0.06 0.03 0.07 0.15 0.18 0.28
Unemployment 6.21 2.54 1.90 4.40 5.80 7.60 14.30
Education 0.32 0.10 0.11 0.25 0.29 0.38 0.59
Reli 0.53 0.12 0.28 0.44 0.54 0.60 0.80
Income _Capita 39.39 18.55 16.90 27.00 35.39 46.26 126.95
Rural 0.50 0.50 0.00 0.00 0.00 1.00 1.00
Population 13.53 1.25 9.78 12.96 13.67 14.26 16.09

Panel B: Correlations Part I

Variables A B C D E F G

A: lnSales −0.03 0.10 −0.02 −0.40 0.06 0.19

B:Social _Capital −0.03 −0.01 0.09 0.00 −0.00 −0.05
C: AI 0.08 0.00 −0.11 −0.02 −0.07 0.02
D:EI −0.03 0.09 −0.13 0.02 −0.01 0.06
E:Succ _Dec −0.35 −0.00 −0.03 0.02 −0.07 −0.08
F: FCF 0.03 −0.00 −0.07 −0.01 −0.05 −0.03
G: GDP _Growth 0.19 −0.03 0.02 0.05 −0.09 −0.03
H: Union _Mem −0.02 0.30 0.12 0.06 0.01 −0.03 0.02
I: Unemployment −0.04 −0.05 0.04 −0.01 0.04 0.02 −0.24
J: Education 0.01 0.23 0.15 −0.12 −0.01 0.04 −0.06
K: Reli −0.03 0.13 −0.02 0.02 0.01 −0.03 0.04
L: Income _Capita −0.03 0.12 0.12 −0.21 0.01 0.04 −0.13
M: Rural 0.02 0.05 −0.03 0.06 −0.00 0.01 −0.01
N: Population 0.02 −0.42 0.04 −0.09 −0.01 0.00 −0.00

Panel C: Correlations Part II

Variables H I J K L M N

A: lnSales −0.02 −0.05 0.02 −0.03 −0.04 0.02 0.03

B: Social _Capital 0.31 −0.03 0.23 0.13 0.06 0.06 −0.45
C: AI 0.11 0.04 0.15 −0.03 0.10 −0.02 0.06
D: EI 0.07 −0.03 −0.16 0.02 −0.31 0.07 −0.11
E: Succ _Dec 0.01 0.04 −0.02 0.01 0.01 −0.00 −0.01
F: FCF −0.03 0.02 0.05 −0.03 0.06 0.01 0.00
G: GDP _Growth 0.02 −0.21 −0.06 0.04 −0.15 −0.01 0.02
H: Union _Mem 0.12 0.07 0.11 −0.01 −0.19 0.13
I: Unemployment 0.08 −0.00 −0.17 −0.01 0.11 0.05
J: Education 0.10 −0.05 −0.01 0.65 −0.26 0.18
K: Reli 0.14 −0.18 −0.03 0.02 −0.34 0.09
L Income _Capita 0.17 −0.03 0.66 −0.01 −0.26 0.23
M: Rural −0.21 0.12 −0.27 −0.32 −0.27 −0.56
N: Population 0.14 0.05 0.24 0.09 0.20 −0.55

Variables are defined in Appendix A. Spearman (Pearson) correlations are presented above (below) the diagonal. Bold font indicates significance at the 0.01 level

5. Discussion and additional analyses
5.1. Distinction between norms and networks
So far, our results suggest that community social capital, captured
by the strength of norms as well as the density of social networks, ne-
gatively affects asymmetric cost behaviour. However, it is difficult to
differentiate between the possible effects of norms and networks as well
as the corresponding channels by which community social capital has
an influence on cost behaviour. For instance, networks and the corre-
sponding social relationships make managers more optimistic and they
are, accordingly, more likely to refrain from dismissing familiar
employees, which would promote cost asymmetry. Alternatively, the
fear of harsher punishment for social misbehaviour from networks
might restrain managers from taking opportunistic resource adjustment
decisions that would attenuate cost stickiness. Even within this effect of
opportunistic behaviour, the distinction between norms and networks
remains unclear. Is managers’ less opportunistic behaviour attributable
to stronger cooperative norms or the fear of punishment from social
networks?
We address these issues by decomposing our aggregate social capital
measure (Hasan et al., 2017a; Jha, 2017). We repeat the component
analysis based exclusively on pvote and respn, using the first component
(Norms ) to capture the strength of cooperative norms in a county

9
S. Hartlieb, et al. Management Accounting Research 46 (2020) 100640

Table 3 cooperative norms restrict managers’ likelihood of acting opportunis-

Main Results. tically, they should consider personal motives to a lesser extent when
Coefficient t-statistic taking cost decisions, thereby reducing the level of cost stickiness. As
such, this provides additional evidence in favour of H1. By contrast,
Basic Model social networks are more likely to establish social ties and create an
0 : Intercept 0.006 (1.61)
optimistic environment, presumably resulting in a higher degree of cost
1: lnSales 0.906 *** (20.28)
stickiness. However, in our setting, social networks seem to affect re-
2: Dec × lnSales −0.279 ** (-2.34)
source adjustment choices mainly through the channel of agency con-
Three-Way Interaction Terms
0.255*** (3.08)
flicts. They play a subordinate role in the negative effect of community
3 : Social _Capital
(-5.27) social capital on cost stickiness. Thus, we are unable to provide evi-
4: AI −0.053 ***
(-2.27) dence supporting H2.
5: EI −0.015 **
6 : Succ _Dec 0.076 *** (8.17)
7: FCF −0.570 *** (-9.42)
(5.15) 5.2. Possible distorting effects of religion, political activism or unionisation
8: GDP _Growth 0.011 ***
9: Union _Mem 0.044 (0.39)
10 : Unemployment 0.001 (0.62) A constantly recurring concern in social capital research is whether
11 : Education −0.048 (-0.39) the measures employed really do capture a socio-economic phenom-
12 : Reli −0.067 (-1.13) enon that is independent from other distorting phenomena. In parti-
13 : Income _Capita −0.001 (-0.90) cular, the distinction between social and religious influences is often
14 : Rural −0.024 (-1.43) discussed (e.g., Jha and Chen, 2015). In general, ‘religious’ can be de-
15 : Population 0.106 (1.42) fined as the faith in God and active involvement in religious pursuits
Two-Way Interaction Terms whereas social capital is the propensity to honour obligations as well as
16 : Social _Capital −0.010 (-0.34)
other norms that facilitate social cooperation and generate trust (Jha,
17 : AI −0.029 *** (-9.35)
2017). McGuire et al. (2012) find that religious norms produce a similar
18 : EI 0.018 *** (7.47)
effect to social cooperative norms, thus mitigating opportunistic man-
19 : FCF 0.352 *** (14.84)
0.001 (0.59)
agerial behaviour. This is in line with some studies identifying religious
20 : GDP _Growth
(2.56) activities as a source of social capital (e.g., Smidt, 1999). Nevertheless,
21: Union _Mem 0.113 **
−0.000 (-0.26) there are also certain studies finding that social capital and being re-
22 : Unemployment
0.030 (0.79) ligious are not statistically, or even negatively, connected (e.g.,
23 : Education
24 : Reli −0.018 (-0.85) McCleary and Barro, 2006; Berggren and Bjørnskov, 2011).
25 : Income _Capita 0.000 (1.30) We provide additional, untabulated empirical tests to alleviate this
26 : Rural 0.011 * (1.79) concern (Jha, 2017).22 First, we consider the relative effects of religion
27 :
Population −0.001 (-0.39) and community social capital by running our main regression twice,
Year/Industry/County Fixed Effects Included once with Social _Capital and once with Reli . While the coefficient on
N 52,870
Social _Capital is positive and significant, the coefficient on Reli is ne-
R2 93.42%
gative and not statistically different from zero. When we re-run the
Adj. R2 93.31%
main model with both concepts, we find that the coefficient for
Table 3 presents regression results from our main (2) model. ***, **, * indicate Social _Capital hardly changes. Second, we repeat our test with a
two-sided significance at the 0.01, 0.05 and 0.1 levels, respectively. Robust t- modified social capital measure. For the computation of our original
statistics, clustered at the firm-level, are presented in parentheses. Variables are measure, we use the number of social organisations per county, which
defined in Appendix A. include the number of religious associations. To distinguish the con-

Table 4
Subsample Analysis: Impact of Community Social Capital on the Degree of Cost Stickiness.
Sample 0 1 2 1 + 2

High Community Social Capital N = 13,210 / Adj. R2 = 93.78% 0.006 *** (7.65) 0.956 *** (165.03) −0.009(-0.77) 0.947 *** (102.85)
Low Community Social Capital N = 13,243 / Adj. R2 = 91.71% 0.007 *** (7.70) 0.944 *** (174.76) −0.063 *** (-4.40) 0.881 *** (70.22)
Difference between the Subsamples −0.001(-0.64) 0.012(1.45) 0.054 *** (2.90) 0.066 *** (4.22)

Table 4 presents regression results from the basic model (1) for subsamples of counties (county-years) classified as high (upper quartile) or low (lower quartile) social
capital regions. * * *, **, * indicate two-sided significance at the 0.01, 0.05 and 0.1 levels, respectively. Robust t-statistics, clustered at the firm-level, are presented in
parentheses.

(Rupasingha et al., 2006). Similarly, we create a Networks variable as
the first component of a principal component analysis for nccs and assn
capturing the density of social networks.
We separately substitute these decomposed community social ca-
pital measures for our aggregate variable in Table 6 (Columns 1 and 2).
The estimates on both variables are positive, but significant only for
Norms , whereas the coefficient on Networks is slightly insignificant. In
Column 3, we include both variables to identify the constructs’ relative
effects. In this case, Norms remains significantly positive whilst the
coefficient on Networks is clearly insignificant. This indicates that
norms play the dominant role in our setting, which corroborates our
theoretical considerations. Since social science research suggests that
cepts more clearly, we remove religious associations and the result
continues to hold. These analyses indicate that the effect of community
social capital goes beyond that of religion, with these two constructs
measuring different aspects of human interaction and behaviour.
We further discuss concerns raised in previous research (e.g., Jha,
2017) that the results could largely be driven by political activism in-
stead of community social capital. Bonaparte and Kumar (2013) show
that politically active regions have relatively more investment clubs
and institutional investors. Due to their advantages over individual
22
Detailed tables for all untabulated analyses in this study are available upon
request from the authors.

10
S. Hartlieb, et al. Management Accounting Research 46 (2020) 100640

Table 5
Sensitivity Tests.
(1) Alternative Sample Selection Procedure (2) Modified Sample Selection I (3) Modified Sample Selection II

lnSales 0.893 *** 0.880 *** 0.838 ***

(17.66) (17.80) (15.78)
Dec × lnSales −0.319 *** −0.444 *** −0.173
(-3.28) (-2.93) (-1.63)
Dec × lnSales × Social _Capital 0.142 ** 0.229 *** 0.164 **
(2.24) (2.54) (2.25)
Firm/County Controls Included Included Included
Year/Industry/County Fixed Effects Included Included Included
N 63,819 63,836 64,349
Adj. R2 76.73% 89.47% 86.51%

(4) Exclude largest/smallest Counties (5) Social Capital Measure w/o Interpolation (6) Alternative Social Capital Measure

lnSales 0.965 *** 1.003 *** 0.926 ***

(12.11) (10.19) (25.08)
Dec × lnSales −0.364 * −0.402 *** −0.121
(-1.65) (-2.59) (-1.33)
Dec × lnSales × Social _Capital 0.316 *** 0.367 ** 1.044 *
(2.58) (2.29) (1.85)
Firm/County Controls Included Included Included
Year/Industry/County Fixed Effects Included Included Included
N 32,471 10,637 52,870
Adj. R2 93.73% 94.14% 93.31%

Table 5 presents results of several robustness tests fromour main model (2). For brevity, only the pertinent independent variables are reported. In column (1), we use
an alternative sample selection process based on Banker et al. (2013). Thus, we discard firm-years if sales or costs are missing or negative for the current or two prior
years; costs are less than 50 percent or greater than 200 percent of sales for the current or two prior years; or total assets are negative for the current year. Finally, we
remove outliers at the 0.01 level in each tail for the log-change in costs and sales. In column (2), we slightly modify our sample selection process and remove the
restriction recommended by Anderson and Lanen (2009) that costs andsales are not allowed to move in opposite directions. In column (3), we again modify the
sample and suppress the restriction that costs should not exceed sales. In column (4), we repeat the analyses after excluding counties with more than 1,000 or less
than 50 observations. In column (5), we use the original social capital index without interpolation (Rupasingha et al., 2006 Rupasingha et al. 2006) and, therefore, re-
run the main model only for the years 1990, 1997, 2005, 2009 and 2014. In column (6), we follow Hasan et al. (2017a) and use the per capita organ donors in a U.S.
state as an alternative proxy for social capital (Data source: Organ Procurement and Transplantation Network (OPTN)). ***, **, * indicate two-sided significance at
the 0.01, 0.05 and 0.1 levels, respectively. Robust t-statistics, clustered at the firm-level, are presented in parentheses. Variables are defined in Appendix A.

positively associated with cost asymmetry. They also consider trade

Table 6 union density as an additional labour market characteristic. Accord-
Norms vs. Networks.
ingly, to ensure that we do not solely (indirectly) capture the effects of
Norms Networks Both unionisation on cost behaviour, we re-run our model without con-
sidering labour organisations in assn for the computation of our social
lnSales 0.911 *** 0.899 *** 0.914 ***
capital measure. However, our main results are still unaffected.
(20.44) (21.87) (19.62)
Dec × lnSales −0.182 * −0.163 −0.299 **
(-1.66) (-1.50) (-2.40)
5.3. Geographically dispersed firms
Dec × lnSales × Norms 0.123 ** 0.132 **
(2.38) (2.54)
Dec × lnSales × Networks 0.172 0.167 So far, our findings suggest that managers of firms headquartered in
(1.64) (1.12) high social capital counties take less opportunistic resource adjustment
Firm/County Controls Included Included Included
decisions, thereby mitigating asymmetric cost behaviour.
Year/Industry/County Fixed Effects Included Included Included
93.31% 93.31% 93.31%
Consequently, we implicitly assume that all major resource adjustment
Adj. R2
choices are made by managers located at the firm’s headquarters, or
Table 6 presents results from our main model (2) with the separated community that firm policies are determined by top management and enacted more
social capital components. In the first column, we include only the Norms or less homogenously across all subsidiaries. However, to some extent,
component, while the second column refers only to the Networks component of these decisions might also take place at subsidiaries located in other
community social capital. Column 3 combines both components. For brevity, counties. With the rare exception that all respective counties exhibit
again only the pertinent independent variables are reported. * * *, **, * indicate similar patterns of community social capital, geographical dispersion
two-sided significance at the 0.01, 0.05 and 0.1 levels, respectively. Robust t- might work against our findings.
statistics, clustered at the firm-level, are presented in parentheses. Variables are
We explore this possibility by adopting an approach similar to that
defined in Appendix A.
taken by Hasan et al. (2017a), who use material subsidiary disclosures
at state-level in Exhibit 21 of firms’ 10 K filings.23 We divide our sample
investors in monitoring managers, executives are less likely to act op-
firms into two subsamples in line with their level of geographical di-
portunistically in those regions (Chhaochharia et al., 2012). We again
versity. We categorise firms with subsidiaries in four U.S. states or more
address this issue by adjusting our community social capital measure.
as geographically diversified since more than 50% of our firms report
We exclude the electoral participation rate from our principal compo-
material subsidiaries in three states or less. For both subsamples, the
nent analysis and the number of political organisations from assn. Our
result remains robust against these alterations.
Finally, we again discuss the role of unionisation in our setting. 23
The data is collected by Scott Dyreng and available on his personal website:
Banker et al. (2013) find that stricter employment protection laws are https://sites.google.com/site/scottdyreng/Home/data-and-code/EX21-Dataset.

11
S. Hartlieb, et al.
coefficient on Social _Capital is significantly positive. The difference
between the coefficients is even statistically insignificant.24 Thus, the
community social capital level at firms’ headquarters has the same ef-
fect on cost behaviour independent from firms’ geographical dispersion,
indicating that cost behaviour decisions are more likely to take place at
headquarter rather than division-level.
5.4. Relationship between community social capital, managerial
opportunism and corporate governance
5.4.1. Extended main model
Our inherent assumption in this study has been that community
social capital affects cost behaviour by influencing managerial beha-
viour and managements’ commitment to firms. In our baseline regres-
sion model (2), we control for managerial opportunism by including
FCF as a significant empire building antecedent. However, Chen et al.
(2012) consider additional proxies for managerial motives not to adapt
capacity. They argue that executives with longer tenure (Tenure ) should
have greater empire building incentives since they benefit dis-
proportionally from higher compensation with firm size increases.
Furthermore, such incentives should increase with CEO horizon
(Horizon) as the expected cumulative future benefits (e.g., compensa-
tion or prestige) also increase. Finally, the structure of managers’
compensation schemes should also make an impact. The higher the
percentage of fixed pay in managers’ compensation packages
(Fixed _Pay ) , the lower should be the corresponding empire building
incentives, resulting in less cost asymmetry. Chen et al. (2012) also
control for corporate governance since, besides community social ca-
pital, better governance and internal controls might also restrain
managers from acting opportunistically. They consider the total number
of board members (Board _Size) , CEO duality (CEO _Chair _Sep ) and the
percentage of independent board directors (Board _Indep) .25
In order to rule out the possibilities that our results might be driven
only by corporate governance or empire building measures rather than
community social capital, we extend our model by these variables. This
significantly reduces the number of observations, since we require data
from Execucomp for opportunism measures and from ISS for govern-
ance variables, which are not available for all sample firms.26 Despite
the additional control variables, untabulated results document that our
coefficient of interest on the three-way interaction term with the
community social capital index remains positive and significant at the
0.01 level.
5.4.2. Impact of community social capital on managerial opportunism in
cost behaviour decisions
Results so far indicate that social norms restrict managers from
acting opportunistically which reduces cost stickiness. To test this un-
derlying assumption from H1 about whether community social capital
really mitigates opportunistic behaviour on cost stickiness, we replicate
the subsample test of Chen et al. (2012). We apply our basic cost
stickiness model extended by the economic firm-level controls and four
managerial opportunism proxies. Then, we compare their impact on
cost stickiness for counties categorised as high social capital counties
(social capital value in the upper quartile) or low social capital counties
24
We test for the significance of the difference between the coefficients em-
ploying the pooled (full) sample and including the diversification dummy
variable to distinguish between the two subsamples. Applying a different
threshold, such as classifying a firm as geographically diverse if it has material
subsidiaries in five or more states does not change our inferences [untabulated].
25
All variables from this section are again described more precisely in
Appendix A.
26
As such, we consider only FCF in our baseline regression model. This en-
ables our main analyses to be generalisable to a large portion of the U.S., which
is important for our research question. When we require data availability from
Execucomp and/or ISS, we lose more than 60% of our sample counties.
12
Management Accounting Research 46 (2020) 100640
(social capital in the lower quartile).27 The results are reported in
Table 7 (Panel A). For low social capital counties, we find that all
coefficients exhibit the expected sign and three out of four empire
building incentive proxies are significant (FCF , Tenure and Fixed _Pay ).
In high community social capital counties, however, all estimates are
insignificant implying that managerial opportunism in terms of empire
building does not play a major role for cost behaviour in these counties.
While we agree that there are other opportunistic motives for cost
stickiness besides empire building (e.g., personal anguish of taking the
hard decision of dismissing familiar employees), this indicates that
social capital restrains managers’ self-interested behaviour when taking
resource adjustment decisions. Summarised, these results support our
assumption in H1 that social capital mitigates cost stickiness by alle-
viating the agency problem and the impact of managerial motives.
5.4.3. Relationship between community social capital and corporate
governance
The results of this study indicate that social capital as an external
environmental factor mitigates managerial motives for cost stickiness.
In prior studies, corporate governance as the ‘internal environment’ has
also been identified as important for restricting the impact of man-
agerial opportunism on cost behaviour (Chen et al., 2012; Calleja et al.,
2006). This leads to the question of how social capital and corporate
governance mechanisms are related. We again conduct a subsample test
in order to compare the impact of corporate governance on cost be-
haviour between high and low social capital county-years (Table 7,
Panel B). For high social capital counties, we do not find any significant
coefficient for the corporate governance proxies. Conversely, in low
social capital counties two governance measures (Board _Size and
CEO _Chair _Sep ) are significantly positive at the 0.05 or 0.01 level,
respectively. This result indicates that corporate governance and social
capital are substitutes for each other. More socially regulated external
environments seem to lessen the necessity for stringent internal cor-
porate governance mechanisms.
5.5. Different cost categories
In all previous analyses, we employ total operating costs to examine
the effect of community social capital on cost behaviour. We focus on
operating costs since they are highly subject to managerial discretion,
capturing a broader extent of managerial cost behaviour choices. For
example, operating costs not only incorporate labour costs but also
include costs of manufacturing goods, providing services as well as
costs connected with marketing and distribution. As such, they are not
subject to potential distortions caused by discretionary allocations of
costs to different cost categories (Subramaniam and Weidenmier
Watson, 2016). In particular, managers can make use of leeway in the
classification of costs to SGA costs or COGS. Hence, the use of total
operating costs enables us to examine the impact of community social
capital on cost behaviour adequately and comprehensively, in line with
a growing body of cost stickiness literature (e.g., Balakrishnan and
Gruca, 2008; Weiss, 2010; Kama and Weiss, 2013; Banker et al., 2013;
Kitching et al., 2016; Rouxelin et al., 2018). This is important since our
theoretical discussion suggests that community social capital might
affect personnel decisions (H2), which influence labour costs, a major
component of both SGA costs together with COGS, as well as man-
agerial opportunism (H1), which should primarily affect SGA costs.
In this test, we consider the effect of community social capital on
27
If we apply a median split, the main conclusion holds. In this case, only
FCF becomes significant for the high social capital subsample whereas the low
social capital sample exhibits three significant coefficients. For the corporate
governance analysis,Board _Size becomes significant for the high social capital
sample but the low social capital sample still exhibits two significant coeffi-
cients for the governance controls.
S. Hartlieb, et al. Management Accounting Research 46 (2020) 100640

Table 7 30 percent. Finally, the sample firms must have at least three usable
Community Social Capital, Managerial Opportunism and Corporate observations.
Governance. Untabulated results reveal that, for total operating costs, there is
Panel A: Effect of Community Social Capital on Managerial Opportunism again a positive and highly significant estimate on the three-way in-
teraction term with Social _Capital for these alternative samples.
High Social Capital Low Social Capital Concerning SGA, we also find a positive and significant coefficient for
the effect of community social capital on costs asymmetry. For COGS
lnSales 0.950 *** 0.978 ***
(47.45) (53.77)
we again find a positive coefficient, but the association is insignificant
Dec × lnSales −0.124 ** −0.295 ***
for both samples. This result is reasonable since SGA costs capture most
(-2.44) (-4.94) of the costs incurred in the corporate office (e.g., office payroll and
Dec × lnSales × FCF −0.144 −0.620 ** expenses, travel and entertainment, hiring and training of specialist
(-0.76) (-2.22) employees) and thus are highly subject to managerial empire building
Dec × lnSales × Tenure 0.001 −0.007 *** incentives as well as opportunism (Chen et al., 2012). Since the main
(0.25) (-2.61)
analyses suggest that community social capital primarily restrains the
Dec × lnSales × Horizon 0.008 0.016
(0.21) (0.41)
impact of these incentives on cost behaviour decisions, it primarily
Dec × lnSales × Fixed _Pay 0.015 0.113 * reduces SGA cost asymmetry.29
(0.20) (1.89)
Firm Controls Included Included
Year/Industry Fixed Effects Included Included 6. Conclusion
Adj. R2 94.62% 91.61%
N 3,898 4,037 We investigate whether social capital, measured at the county-level
in which a firm is headquartered, affects its cost behaviour. As such, we
Panel B: Relationship between Community Social Capital and Corporate Governance combine two different strands of literature. Community social capital is
High Social Low Social Capital
a socio-economic construct that has been identified as a significant
Capital factor in corporate and managerial behaviour, alike. Cost stickiness is a
well-documented property of costs that is substantially based on man-
lnSales 0.907 *** 0.847 *** agerial discretion. We find that community social capital significantly
(18.83) (16.38) mitigates asymmetric cost behaviour. We identify social norms that
Dec × lnSales −0.214 * −0.598 ***
restrain managers from taking opportunistic resource adjustment de-
(-1.86) (-4.36)
0.009
cisions which would induce cost stickiness, as the dominant effect in
Dec × lnSales × Board _Size 0.025 **
(1.11) (2.55) our setting.
Dec × lnSales × Board _Indep 0.019 0.102 To our knowledge, this study is the first that demonstrates a re-
(0.19) (0.78) lationship between a socio-economic, environmental factor such as
Dec × lnSales × CEO _Chair _Sep −0.048 0.123 *** social capital and sticky cost behaviour at the sub-national level. Prior
(-1.02) (2.89)
research documents the effect of legal institutions (i.e., employment
Firm Controls Included Included
Year/Industry Fixed Effects Included Included
legislation; Banker et al., 2013) and national culture (Kitching et al.,
Adj. R2 93.49% 89.86% 2016) on cost stickiness at country-level. As such, the results here have
N 2,356 2,562 significant implications for deepening our understanding of how man-
agers take resource adjustment decisions and why the level of cost
Table 7 presents results from subsample tests to examine the relationship be-
tween cost stickiness, community social capital, managerial opportunism and asymmetry varies across firms as well as regions within the same nation
corporate governance. County-years with a social capital value in the upper and, thus, the same overall legal and cultural framework. Moreover, in
quartile are characterised as high social capital regions, and county-years with a additional analyses we provide evidence that corporate governance and
social capital valuein the lowest quartile are defined as a low social capital social capital are substitutes for each other. Accordingly, shareholders
region. We replicate the subsample test of Chen et al. (2012) and apply our need to put in place more effective corporate governance mechanisms
basic cost stickiness model extended by the economic firm-level controls as well in regions with less social control and cooperative norms to reign in
as managerial opportunism or corporate governance proxies, respectively. For self-serving managerial behaviour.
brevity, in all tests we again only report the pertinent independent variables However, we acknowledge that the statistical associations we
and three-way interaction terms. ***,**, * indicate two-sided significance at the document do not necessarily establish causal relations.30 Moreover, we
0.01, 0.05 and 0.1 levels, respectively. Robust t-statistics, clustered at the firm-
employ a wide range of county and firm-level controls which the lit-
level, are presented in parenthesis. variables are defined in Appendix A.
erature on cost stickiness as well as social capital have established up to
this point. Nevertheless, there remains the possibility of an omitted
cost stickiness separately for both SGA and COGS in order to investigate
which cost category is the primary driver for the negative relationship
identified for total operating costs.28 First, we compare the effect of 29
Nevertheless, if managers play the “SG&A shell game” (White and
community social capital on both cost types for those firm-years from Dieckman, 2005, 20) and move expenses from SGA costs to COGS this might
our final sample that have non-missing values for both SGA and COGS. distort the separate cost category results. More specifically, an SGA decrease
Furthermore, we apply the joint sample selection procedure developed following a decrease in firm activity might be the result of true cost cutting
by Subramaniam and Weidenmier Watson (2016), which, to our measures but also result from SGA costs being reclassified into COGS. Hence,
knowledge, is the only study with a joint and comparative focus on SGA there is the distinct possibility that this test provides initial evidence of the
“shell game” and over (under-)estimates the effect of community social capital
as well as COGS. More precisely, observations must have SGA, COGS
on SGA costs (COGS), respectively. Having said that, the “shell game” cannot
and sales in the current and preceding year and we remove observations
distort the main results building on OC.
where SGA or COGS exceed sales revenue or sales change by more than 30
A possible approach to alleviate this concern would be to exploit shocks
when firms move their headquarters to another county and, thus, a different
social capital environment and compare the level of cost behaviour before and
28
We do not consider labour costs directly due to the high proportion of after these events. However, with the available data, we are not able to identify
missing values and the low reliability of the data (for a discussion, cf., Banker headquarter shifts for our sample firms, and the cross-sectional design to
et al. (2013)). measure cost stickiness does not allow for such an analysis.

13
S. Hartlieb, et al. Management Accounting Research 46 (2020) 100640

correlated variable. Finally, social capital when studied from an inter- dominant role, resulting in a negative relationship. After all, this result
national perspective might affect cost behaviour through different cannot necessarily be applied to other countries or to a cross-country
channels. Concerning the U.S., our focus of attention here, results analysis with a national measure of social capital. We leave it to future
suggest that social norms and managerial opportunism are playing the research to address these important research questions.

Appendix A

Variable definitions

Variable Definition #

Cost Stickiness Model

ln OC Natural log of a firm’s annual change in operating costs (xopr).
ln Sales Natural log of a firm’s annual change in sales (sale).
Dec Indicator variable that equals 1 if sales (sale) decrease between two fiscal years, and 0 otherwise.
Main Variable of Interest
Social _Capital Standardised community social capital measure at the county-level, constructed as in Rupasingha et al. (2006) and described in more detail in Appendix B. Source:
Northeast Regional Center for Rural Development (NRCRD)
Firm-level Controls
AI Asset intensity calculated as the natural log of total current assets (act) divided by sales (sale).
EI Employee intensity calculated as the natural log of the number of employees (emp) divided by sales (sale).
Succ _Dec Indicator variable that equals one if sales (sale) decrease in two consecutive years, and zero otherwise.
FCF Free cash flow, measured as cash flow from operating activities (oancf) – common (dvc) and preferred dividend (dpv) payments scaled by total assets (at).
State-level Controls
GDP _Growth The percentage change from the preceding period in per capita real GDP. Source: U.S. Bureau of Economic Analysis (BEA)
Union _Mem Percentage of union membership. Source: Union Membership and Coverage Database
County-level Controls
Unemployment Unemployment rate, calculated as the number of unemployed persons divided by the total labour force. Source: Bureau of Labor Statistics
Income _Capita Income per capita in a county deflated by the consumer price index. Source: U.S. Census Bureau
Education Percentage of people 25 years and over with a bachelor’s degree or higher. Source: U.S. Census Bureau
Reli Percentage of religious adherents in a county. Source: Association of Religion Data Archive (ARDA)
Rural Indicator variable that equals one if the county’s population density is less than the median, and zero otherwise. Population density is the ratio of the population to
the land area. Source: U.S. Bureau of Economic Analysis (BEA)
Population Natural log of the county’s population. Source: U.S. Bureau of Economic Analysis (BEA)
Variables Additional Tests
Tenure The number of years that the CEO has been in office. Source: Execucomp
Horizon Indicator variable, defined as 1 if it is the year of a CEO change or the year immediately preceding a CEO change, 0 otherwise. Source: Execucomp
Fixed _Pay The ratio of salary plus bonus divided by total compensation. Source: Execucomp
Board _Size Total number of members on the board of directors. Source: ISS
CEO _Chair _Sep Indicator variable that is equal to 1 if the CEO and the chairman of the board are not the same person, and 0 otherwise. Source: ISS
Board _Indep Percentage of independent (outside) directors on the board. Source: ISS
# Compustat mnemonics in parentheses.

Appendix B

Construction of the Community Social Capital Measure.

Variable Definition

Principal factors
pvote a Electoral voter turnout (1st factor)
respn Response rate to Census Bureau’s survey (2nd factor)
nccs Number of non-profit organisations without including those with an international approach divided by population per 10,000 (3rd factor)
assn b Average number of social organisations divided by population per 10,000 (4th factor)
Social organisations
reli g Number of religious organisations
civic Number of civic and social associations
bus Number of business associations
pol Number of political organisations
prof Number of professional organisations
labour Number of labour organisations
bowl Number of bowling centres
fitns Number of physical fitness facilities
golf Number of public golf courses
sport Number of sport clubs, managers, and promoters

In this appendix, we describe the construction of our community social capital measure. The corresponding data at the county-level are provided
by the NRCRD at the Pennsylvania State University (available here: http://aese.psu.edu/nercrd/community/social-capital-resources). The NRCRD
reports data for the variables listed above for the years 1990, 1997, 2005, 2009 and 2014. To construct our index, we generally follow the steps of
Rupasingha et al. (2006). We conduct a principal component analysis based on pvote, respn, nccs and assn and extract the first component as our
community social capital measure. We then use linear interpolation to fill the intervening years 1991–1996, 1998–2004, 2006–2008 and

14
S. Hartlieb, et al.
2010–2013. Finally, we standardise the variable.
a
For the year 1990, NRCRD reports data for pvote in the years 1988 and 1992. We follow Rupasingha et al. (2006) and use the data for 1988 for
our computation. However, our results hold when we use the data for 1992 or the average of 1988 and 1992.
b
For the years 1990 and 1997, assn includes two additional types of social organisations besides the ten listed above (membership sports and
recreation clubs; membership organisations not else-where classified). We do not believe that this leads to inconsistencies in the measurement of the
number of social organisations (the Pearson correlation between assn in 1990 and 2005 amounts to 0.83). Nevertheless, our results do not change if
we remove these two variables for the computation of assn in the years 1990 and 1997.
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