Contagion and Competitive Spillover Effects Following Financial Reporting Fraud
Nongnapat Thosuwanchot, David M. Gomulya, Eugene Kang · Academy of Management Proceedings · 2016
How would a negative event befalling a firm in an industry affect other firms in the same industry? This is the primary question behind this study. Using data on errant firms investigated for financial reporting fraud (the event) and rival firms collected from 2001 to 2004, we argue and show that such negative events can affect non-errant rival firms not only in a negative manner, but also in a positive manner. In the former, the contagion argument, we support some studies that show how shareholders tend to overgeneralize such negative events and penalize non-errant rival firms for fear of succumbing to the same risk as the errant firm. In the latter, the competitive argument, we offer relatively novel insights on how shareholders could punish errant firms and respond positively to rival firms, especially when rival firms have characteristics that allow them to exploit the misfortune of the errant firms. We discuss theoretical and practical implications of these results.