Accounting Frauds and Investor Reactions Worldwide
Abstract
Using events of high-profile U.S. accounting frauds, we examine investor reactions of more than 18,000 unrelated firms across 40 countries. Despite having no direct economic ties with the U.S. fraud firm whether at the firm, industry or country level, unrelated firms experience stock price decreases during the fraud events. The negative stock price reaction is most evident among firms with higher accruals, indicating investor apprehension about potential earnings overstatements. Examining how country-level characteristics shape investor reactions worldwide, we find that the negative reactions are moderated by legal institutions such as penalties on misstatements, infrastructure facilitating news flows, and perceived similarities in accounting and auditing practices. Analyses examining high-profile accounting frauds in countries outside of the U.S. confirm the global contagion of accounting concerns. Overall, our findings highlight a far-reaching contagion effect where accounting frauds, even from an unrelated source in one country, can trigger worldwide investor concerns about similar accounting failures elsewhere.