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The spillover effect of fraudulent financial reporting on peer firms' investments

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  • Beatty, Anne
  • Liao, Scott
  • Yu, Jeff Jiewei

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.

Suggested Citation

  • Beatty, Anne & Liao, Scott & Yu, Jeff Jiewei, 2013. "The spillover effect of fraudulent financial reporting on peer firms' investments," Journal of Accounting and Economics, Elsevier, vol. 55(2), pages 183-205.
    • Handle: RePEc:eee:jaecon:v:55:y:2013:i:2:p:183-205
    DOI: 10.1016/j.jacceco.2013.01.003
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    References listed on IDEAS

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    More about this item

    Keywords

    Fraudulent financial reporting; Spillover effect; Investment efficiency;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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