Local Happiness and Corporate Financial Misconduct: Does Happiness Reduce Organizational Opportunistic Behavior?

•We examine the impact of local happiness on corporate financial misconduct.•Firms headquartered in happier regions are less likely to engage in financial misconduct.•Local happiness promotes the building of regional social capital.•The cost of misconduct is higher in regions with higher happiness levels.•The effect of local happiness varies across various regions and firms. This study explores the impact of local happiness on corporate financial misconduct. Using large-scale survey data to construct the measurement of the local happiness level, we find that firms headquartered in happier regions are less likely to engage in financial misconduct. Our mechanism analysis indicates that local happiness promotes the building of regional social capital and the cost of misconduct is higher in regions with higher happiness levels, which explains the mitigating effect of local happiness on corporate misconduct. Moreover, the effect of local happiness is more salient when firms are in regions with a lower level of marketization and less financial supervision expenditures and firms with weaker corporate governance mechanisms and risk tolerance. Our results highlight that happiness, a measure of subjective well-being, can serve as a substitute for formal institutions to alleviate organizational misconduct, especially when formal institutions are weak.