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

Purpose: This study examines how firms with no connections to Mafia organiza-tions respond to the tax avoidance and earnings management practices of mafia-con-nected peers, focusing on both industry and geographic spillovers. While prior re-search has documented the financial practices of mafia-connected 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 mafia-related crimes. Using a large sample of private firms in the Lombardy region from 2006 to 2013, we examine how exposure to mafia-connected 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 mafia-connected firms is associated with increased tax-related restatements and income-decreasing abnormal accruals. We also document that unconnected firms in high-crime provinces show stronger tax avoidance responses, suggesting that broader criminal exposure ampli-fies the influence of mafia-connected peers. Originality/value: This study provides the first large-sample evidence of how orga-nized crime influences non-criminal 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 anti-money launder-ing enforcement and transparency measures to curb organized crime's economic in-fluence. Firms in high-risk regions should strengthen governance and auditing prac-tices to mitigate exposure.