Researchers at Ohio State and Indiana University found a “spillover effect” of corporate misconduct on local financially motivated crimes such as robbery and theft. The study revealed that city financial crimes increased by 2.3 percent in the year following news of local corporate misconduct. Credit: Adreyn Yates | Lantern File Photo
Aside from being a PR nightmare, a new study suggests that corporate fraud may stoke crime rates in the community.
Researchers at Ohio State and Indiana University found a “spillover effect” of corporate misconduct on local financially motivated crimes such as robbery and theft. Studies on corporate misconduct traditionally focus on the effect on a company, but Eric Holzman, assistant professor of accounting at Ohio State and co-author of the study, said he wanted to investigate the broader societal implications.
“It could really damage the economics of a city,” Holzman said. “I just felt like there was something more than just GDP. It felt like a bomb had gone off in some of these smaller towns.”
The study revealed that city financial crimes increased by 2.3 percent in the year following news of local corporate misconduct.
The researchers analyzed 296 instances of accounting fraud between 1996 and 2013, comparing property crime rates in the cities home to the offending firms. Holzman said although the study can’t determine exact causes for increased crime, corporate fraud may cause job loss, placing financial stress on the community.
“If I was someone working in a company like this and you see someone who is already making several million dollars a year and they engage in some form of fraud to potentially increase their wealth, I would find that to be kind of abhorrent,” Holzman said. “Then it leads to the dissolution of a company or a large part of it, and I lose my job.”
Holzman said this effect is felt most severely in smaller cities where there may not be many job opportunities. The study also found a more pronounced effect when the fraud received media attention, a company’s stock prices declined and a community had existing income inequality.
Holzman co-authored the study with two researchers from Indiana University. He met Brian Miller while earning his doctorate degree at Indiana University. Miller said the two of them worked on projects together before, but this was the first time they joined forces with a third co-author, Brian Williams.
“It worked out really well, we all got along really well and contributed in our own ways,” Miller said.
After considering the impact of corporate fraud on a few different facets of society, Miller said Holzman was the one to suggest looking into the effect of fraud on crime rates.
“The really unique part about it is to show that those bad actions can spill over and affect people that were tangentially involved by living in the same community,” Miller said. “I think that that was the biggest thing to us, to make it a broader finding.”
Holzman said looking forward, the researchers are interested in exploring the precedent that fraudulent activity among the top 0.1 percent sets for the rest of society.
“Does that have a trickle-down effect where it helps people justify making ethical decisions that they wouldn’t otherwise?” Holzman said.
Miller said this study opens the door for future research into who bears the biggest punishment for corporate fraud, whether the “bad actors” or the community members.
