Contagious Accounting Information

Financial report not only transfers corporate financial condition and operate outcomes to outsiders, but also transfer the industry information. Fraudulent financial reports not only affect its own investment, but the peers firms’. We investigate how accounting frauds affect peer firms’ investment. Using a sample of China’s listed firms from 1993 to 2012 of 32 fraudulent firms’9960 peer and non-peer firms, we document that peers react to the fraudulent reports by increasing investment during fraud periods, suggesting the existence of the spillover effect of accounting information. Compare to mean peer investment during the pre-scandal period, the average investment of peers increase 17% during the scandal period. We use Lead-Lag results to confirm that out results are not driven by reverse causality. Furthermore, we investigate how product market competition, industry position of fraudulent firms and executive characteristics of peer firms affect the spillover effect. We find that spillover effect is more pronounced when they are in industry of low product market competition. When the fraudulent firm has more market share, the spillover effect is more pronounced. If there are less female executives in the board of directors, the spillover effect is more pronounced. We also test whether the investment during the fraud period can decrease the market value or performance of peer firms, and find the results consist with our hypothesis. In our additional test, we find that the salary of peer firms’ executives also decreased. This paper further studied the effects of fraudulent accounting reports on resource allocation, and reached a conclusion as reference for investment deciders and regulatory authorities.