Financial Misrepresentation and its Impact on Rivals
Indiana University - Kelley School of Business - Department of Finance
Federal Reserve Board, Washington D.C.
INSEAD - Finance
July 13, 2011
Forthcoming, Financial Management
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.
Number of Pages in PDF File: 45
Keywords: Fraud, iearnings manipulation, industry competition
JEL Classification: G3, G14
Date posted: August 13, 2005 ; Last revised: May 12, 2014