Financial Misrepresentation and Its Impact on Rivals


  • Eitan Goldman,

  • Urs Peyer,

  • Irina Stefanescu

    Search for more papers by this author
    • Eitan Goldman is an Associate Professor of Finance and FedEx Faculty Fellow at Indiana University, Bloomington, IN 47405. Urs Peyer is an Associate Professor of Finance at INSEAD, Fontainebleau, France, 77305. Irina Stefanescu is an Assistant Professor of Finance at Indiana University, Bloomington, IN 47405.

  • We would like to thank Bill Christie (editor), an anonymous referee, David Denis, Nishant Dass, Mattias Kahl, Jorg Rocholl, Anil Shivdasani, Greg Udell, Xiaoyun Yu, and seminar participants at the University of North Carolina, Indiana University, the EFA 2006 meetings in Zurich, the FMA Europe 2007 meetings in Barcelona, the FMA 2007 meetings in Orlando, the Indiana-Notre Dame-Purdue Finance Symposium 2007, and the Frank Batten Young Scholars Conference 2008 for helpful comments and discussions.


This paper examines how the announcement of an accusation of fraudulent financial misrepresentation affects industry rivals of the accused firm. Consistent with the importance of the industry competition effect, we find that rivals in less competitive industries benefit from the event. However, in competitive industries, the information spillover effect dominates the competition effect, resulting in negative returns to rival shareholders following the event. The spillover effect increases in importance with the severity of the accusation and is more important for opaque rivals and for rivals that had positive stock price reactions to past positive earnings surprises of the accused firm.