The Spillover Effect of Fraudulent Financial Reporting on Peer Firms’ Investments

By Anne L. Beatty, Scott Liao, Jeff Jiewei Yu. 2013

343 citations recorded by the source corpus.

We investigate how high-profile accounting frauds affect peer firms' investment. We document that peers react to the fraudulent reports by increasing investment during fraud periods. We show that this finding is not driven by frauds that have a higher ex ante likelihood of detection or by an association between fraud and investment booms. In addition, we find that peers’ investments increase in fraudulent earnings overstatements, and in industries with higher investor sentiment, lower cost of capital and higher private benefits of control. We also find evidence consistent with equity analysts potentially facilitating the spillover effect.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/e4e719ac1556f1c186c0963aa1850b8189cf0486

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Citations in the corpus

The spillover effects of MD&A disclosures for real investment: The role of industry competition (2019, methodology): “…disclosures provide other companies with information about unknown investment opportunities (Durnev and Mangen, 2009; Badertscher et al., 2013; Beatty et al., 2013). control for bias in MD&As, whenwe focus on the tone of forward-looking statements in MD&As (Li, 2010a), and whenwe use…”
Admitting Mistakes: Home Country Effect on the Reliability of Restatement Reporting (2015, background): “” Beatty et al. (2013) suggest that companies distort their investment behavior based on industry peers’ overstated earnings.”
The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research (2015, background): “…restating firms, but also have information spillover effects on their competitors (Xu et al., 2006; Gleason et al., 2008; Silvers, 2016) as well as negative spillover (or peer) effects on their real investment decisions (e.g., Sidak, 2003; Sadka, 2006; Durnev and Mangen, 2007; Beatty et al., 2013).”
Does credit reporting lead to a decline in relationship lending? Evidence from information sharing technology (2018, unknown): “prior research examines the ways in which one firm’s reporting affects other market participants (Foster 1981; Admati and Pfleiderer 2000; Bushee and Leuz 2005; Badertscher et al. 2013; Beatty et al. 2013), there is little work documenting the effects of principals sharing agents’ records.”
Stock price crash risk: review of the empirical literature (2018, unknown): “This occurs because managers rely on information from their competitors’ financial reports as inputs to developing their competitive strategies (e.g., Bagnoli and Watts, 2010; Beatty, Liao, and Yu, 2013).”
Evidence on Contagion in Earnings Management (2015, background): “The revelation of misconduct at the target firm will lead to a reduction in the market value of peer firms due to their overinvestment and lower industry profitability consistent with Durnev and Magnen (2009), Sadka (2006) and Beatty, Liao, and Yu (2013).”
Information Environment and the Investment Decisions of Multinational Corporations (2013, unknown): “Also see Li (2012), Badertscher et al. (2013) and Beatty et al. (2013).”