Financial Misrepresentation and its Impact on Rivals

Forthcoming, Financial Management

45 Pages Posted: 13 Aug 2005 Last revised: 12 May 2014

Eitan Goldman

Indiana University - Kelley School of Business - Department of Finance

Irina Stefanescu

Federal Reserve Board, Washington D.C.

Urs Peyer

INSEAD - Finance

Date Written: July 13, 2011

Abstract

Firms targeted by Securities and Exchange Commission enforcement actions for fraudulent financial misrepresentation, on average, experience a significant drop in shareholder value. This paper highlights the additional impact of such enforcement actions on the shareholders of rival firms. Consistent with the importance of the industry competition effect we find that rivals in less competitive industries benefit from the event. However, in competitive industries, the information spillover effect dominates the competition effect, resulting in negative returns to rival shareholders following the event. We find that the spillover effect increases in importance with the severity of the accusation of financial misrepresentation. We also find that the information spillover effect is more important for opaque rivals and for rivals that had positive stock price reactions to past positive earnings surprises of the accused firm. Results from this paper shed light on the differential impact of financial misrepresentation on rival firms.

Keywords: Fraud, iearnings manipulation, industry competition

JEL Classification: G3, G14

Suggested Citation

Goldman, Eitan and Stefanescu, Irina and Peyer, Urs, Financial Misrepresentation and its Impact on Rivals (July 13, 2011). Forthcoming, Financial Management. Available at SSRN: https://ssrn.com/abstract=774364 or http://dx.doi.org/10.2139/ssrn.774364

Eitan Goldman (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-856-0749 (Phone)

Irina Stefanescu

Federal Reserve Board, Washington D.C. ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Urs C. Peyer

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4178 (Phone)
+33 1 6072 4045 (Fax)

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