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<p>We investigate how a high-profile firm’s fraudulent reporting shapes its complementary peers’ investment decisions. Under the <i>distorted signal hypothesis</i>, firms across different industries in the production complementarity network may perceive the high-profile firm’s fraudulent accounting information as a signal of high market demand, and respond by suboptimally increasing capital expenditures. Using a stacked Difference-in-Differences research design, we find that complementary firms ramp up investments during the high-profile firm’s scandal period, which is consistent with our hypothesis. To further support our hypothesis, we also show that the effect is more pronounced when common analysts or auditors exist, market sentiment is more heightened, industry cost of capital is lower, and industry competition is higher. The effect is also stronger when the complementor’s market share, institutional ownership, and R&amp;D intensity are lower. Consistent with the signal being distorted, we document that the inefficient investment negatively impacts firm performance and capital market outcomes. Overall, our research contributes to the adverse spillover effects of high-profile firms’ unethical misreporting within the complementarity networks.</p>

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Cross-Industry Spillover Effects of Accounting Frauds on Corporate Investment Decisions: Evidence from the Complementary Production Networks

  • 期刊论文

  • 发表日期：

    2025年7月29日

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  • Nuo Shi,
  • Yi Si,
  • Chongwu Xia

摘要

We investigate how a high-profile firm’s fraudulent reporting shapes its complementary peers’ investment decisions. Under the distorted signal hypothesis, firms across different industries in the production complementarity network may perceive the high-profile firm’s fraudulent accounting information as a signal of high market demand, and respond by suboptimally increasing capital expenditures. Using a stacked Difference-in-Differences research design, we find that complementary firms ramp up investments during the high-profile firm’s scandal period, which is consistent with our hypothesis. To further support our hypothesis, we also show that the effect is more pronounced when common analysts or auditors exist, market sentiment is more heightened, industry cost of capital is lower, and industry competition is higher. The effect is also stronger when the complementor’s market share, institutional ownership, and R&D intensity are lower. Consistent with the signal being distorted, we document that the inefficient investment negatively impacts firm performance and capital market outcomes. Overall, our research contributes to the adverse spillover effects of high-profile firms’ unethical misreporting within the complementarity networks.