Evidence on Contagion in Management of Earnings

In this paper, we study peer firm behavior to ascertain (i) whether exposure to financial misrepresentation fuels similar behavior or deters it among peer firms; and (ii) what factors increase or decrease the likelihood of contagion? The prior years have witnessed a remarkable increase in news about corporate misconduct including fraudulent financial reporting at companies such as Enron, WorldCom, and Tyco, the collapse of Arthur Andersen on allegations of lax or corrupt audit work, tax shelters structured by KPMG to assist clients in minimizing tax obligations, and the revelation of the $50 billion Ponzi scheme run by Bernie Madoff. Given … Read more