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The spillover effect of penalty against peer firm leaders——Evidence from earnings management

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  • Cai, Wenjing
  • Cai, Xinni
  • Wang, Zehao
  • Yang, Ge

Abstract

This paper investigates whether and how the penalty against peer firm leaders influences focal firm's earnings management. By employing a difference-in-difference (DID) approach, we find that penalties on peer firm leaders significantly decrease focal firms’ earnings management, suggesting that firms adjust their expected costs related to misconducts when observing the salient penalties against their peers. Further analyses document that this effect is significantly stronger for firms that have witnessed severer penalties, firms with better corporate governance, and firms located in provinces with stronger law enforcement. Moreover, we find such peer firm penalties mainly decrease focal firms’ upward earnings management rather than downward earnings management.

Suggested Citation

  • Cai, Wenjing & Cai, Xinni & Wang, Zehao & Yang, Ge, 2023. "The spillover effect of penalty against peer firm leaders——Evidence from earnings management," Finance Research Letters, Elsevier, vol. 54(C).
    • Handle: RePEc:eee:finlet:v:54:y:2023:i:c:s1544612323000752
    DOI: 10.1016/j.frl.2023.103701
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    Cited by:

    1. Wang, Zichen & Zhang, Chang, 2023. "Do shareholder litigations have spillover effects on peer companies from the perspective of financing constraints?," Finance Research Letters, Elsevier, vol. 58(PB).

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    More about this item

    Keywords

    Spillover effect; Penalty; Earnings management;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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