The spillover effect of fraudulent financial reporting on peer firms' investments |
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Authors: | Anne Beatty Scott Liao Jeff Jiewei Yu |
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Affiliation: | 1. Fisher College of Business, The Ohio State University, United States;2. Rotman School of Management, University of Toronto, Canada;3. Cox School of Business, Southern Methodist University, United States |
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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. |
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