Guilong Cai , Rui Ge , Jeffrey Pittman , Leon Zolotoy
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The spillover effects of accounting scandals in business groups
We show that the revelation of an accounting scandal in a member firm induces stock price declines among other member firms in the same business group. Additional evidence suggests that the spillover effects of accounting scandals are amplified when peer member firms exhibit wider deviation between the ultimate controller’s voting rights and cash flow rights, demonstrate worse accounting transparency, participate more intensively in related party transactions, and appoint more connected audit partners. Further, we find that the spillover effects subside when the peer member firms engage Big Four auditors. We also document that peer member firms that are later identified as committing accounting fraud suffer sharper stock price declines around the revelation of the initial accounting scandal in the business group. Collectively, our evidence implies that an accounting scandal at a member firm undermines the market values of peer member firms by triggering investors’ concerns about accounting fraud risk for these firms.
期刊介绍:
The Journal of Accounting and Public Policy publishes research papers focusing on the intersection between accounting and public policy. Preference is given to papers illuminating through theoretical or empirical analysis, the effects of accounting on public policy and vice-versa. Subjects treated in this journal include the interface of accounting with economics, political science, sociology, or law. The Journal includes a section entitled Accounting Letters. This section publishes short research articles that should not exceed approximately 3,000 words. The objective of this section is to facilitate the rapid dissemination of important accounting research. Accordingly, articles submitted to this section will be reviewed within fours weeks of receipt, revisions will be limited to one, and publication will occur within four months of acceptance.