Mafia ties and financial reporting quality spillovers : evidence from private firms in Italy

Purpose: This study examines how firms with no connections to Mafia organizations respond to the tax avoidance and earnings management practices of mafiaconnected peers, focusing on both industry and geographic spillovers. While prior research has documented the financial practices of mafiaconnected firms, little is known about how their presence influences otherwise "clean" firms. Design/methodology/approach: We leverage a proprietary dataset from the Italian Internal Intelligence and Security Agency (AISI), which records individuals under investigation for mafiarelated crimes. Using a large sample of private firms in the Lombardy region from 2006 to 2013, we examine how exposure to mafiaconnected peers measured at the industry and geographic levels affects firms' tax avoidance and financial reporting choices. Findings: We find that greater mafia presence is associated with lower effective tax rates among unconnected peers. Geographic proximity to mafiaconnected firms is associated

with increased taxrelated restatements and incomedecreasing abnormal accruals. We also document that unconnected firms in highcrime provinces show stronger tax avoidance responses, suggesting that broader criminal exposure amplifies the influence of mafiaconnected peers. Originality/value: This study provides the first largesample evidence of how organized crime influences noncriminal firms' tax and reporting strategies. Our findings contribute to research on financial reporting and tax avoidance spillovers. Future studies could explore broader implications, including investment and employment decisions. Practical implications: Regulators may benefit from enhanced antimoney laundering enforcement and transparency measures to curb organized crime's economic influence. Firms in highrisk regions should strengthen governance and auditing practices to mitigate exposure. [Publisher's text]