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

59 Pages Posted: 8 Jan 2013

See all articles by Anne Beatty

Anne Beatty

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Scott Liao

University of Toronto - Rotman School of Management

Jeff Jiewei Yu

University of Arizona

Date Written: January 7, 2013

Abstract

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.

Keywords: fraudulent financial reporting, spillover effect, investment efficiency

JEL Classification: M40, M41

Suggested Citation

Beatty, Anne L. and Liao, Wei-Yi (Scott) and Yu, Jeff Jiewei, The Spillover Effect of Fraudulent Financial Reporting on Peer Firms’ Investments (January 7, 2013). Rotman School of Management Working Paper No. 2197429. Available at SSRN: https://ssrn.com/abstract=2197429 or http://dx.doi.org/10.2139/ssrn.2197429

Anne L. Beatty

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

Wei-Yi (Scott) Liao (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Jeff Jiewei Yu

University of Arizona ( email )

Department of History
Tucson, AZ 85721
United States
520-621-1273 (Phone)

HOME PAGE: http://https://accounting.eller.arizona.edu/people/jeff-jiewei-yu

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