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Prior research contends that financial misreporting has a spillover effect on the outcomes of peer firms within the same industry through investment decisions, information risk, and shareholder wealth. We predict and confirm a higher level of scrutiny over financial reporting by external auditors for peer firms that are proximate, in terms of industry membership and geographical proximity, to firms that have announced a fraudulent financial misstatement. Our results suggest a spillover effect on the monitoring of the financial reporting process of proximate peer firms.
Feng Guo, The University of Kansas
Thomas R. Kubick, The University of Kansas
Adi Masli, The University of Kansas