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

Anne Beatty, Scott Liao, Jeff Jiewei Yu

Research output: Contribution to journalArticlepeer-review

104 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)183-205
Number of pages23
JournalJournal of Accounting and Economics
Volume55
Issue number2-3
DOIs
StatePublished - Apr 2013
Externally publishedYes

Keywords

  • Fraudulent financial reporting
  • G30
  • Investment efficiency
  • M41
  • Spillover effect

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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