The Inflating Revenues Of False Financial Reports Effect On Peer Firms’ Investment

Capital market is a huge information market, in this market, the accountinginformation is the most basic information, the use of company’s accountinginformation can affect stakeholders’ decision. Companies in the same industry, theyare in the same market, product similar products and share the client base, peer firmsrely on firms’ financial reports to mitigate uncertainty of the market development andproduct demand. Accounting information is also complicated, WorldCom admittedthat from1999through the first quarter of2002, the company materially overstated itsreported earnings by about9billion dollars in the accounting fraud, in the same time,telecom industry’s annual investment in telecommunication infrastructure more thandoubled between1996and2000, but these investment turned out to be inefficient.The inflating revenue of false financial reports lead peer firms’ investmentinefficiency, because peer firms’ make a judgement on market development andproduct demand based on these distorted information. The same thing also happenedin China. With the increase number of financial restatements in recent years, the studyof the inflating revenues of false financial reports effect on peer firms’ investment letpeer firms screen accounting information, when they get these from capital market,can also find the relationship between firm’s accounting information and peer firms’investment in China.In capital market, there are many factors can affect firms’ investment, in order tofind out the causal relationship–the inflating revenues of false financial reports andthe change in peer firms’ investment, here employ a difference-in-difference approachand propensity score matching method to control for industry and time effects. Thedissertation empirically examines the financial restatement of all companies whichlisted in Shanghai and Shenzhen Stock Exchange from2008-2011, according to theWind industry classification standard, manufacturing industry is chosen as the objectof study in this paper. Peer firms are defined as firms in the same fourth class industryas the scandal firms, control firms are manufacturing listed companies (excluding peerfirms and scandal firms) which share similar overall growth opportunities with peerfirms. By using OLS model, the dissertation examines peer firms’ investment aregreater during the scandal period, and these investment have weaker associations withfuture cash flows, suggesting that investments made during the scandal period are lessefficient.