AAA Spark Meeting of the Regions

Price Contagion Effects of Fraudulent Events of Foreign Issuers: The Evidence from Taiwan

• In Event: Fraud and Financial Misstatement

Abstract

This study investigates the market reaction of foreign issuers when a fraudulent event occurs, leading to investors casting doubt on management's integrity. Using a unique Taiwanese setting, the event study method is used to test the market reaction to the fraudulent event of Pharmally. Negative cumulative abnormal returns (CAR) are found through empirical analyses. In addition, foreign issuers using the same audit firm and audit partner as Pharmally also suffered from significant negative cumulative abnormal returns (CAR), which indicates that they were affected by price contagion effects due to low-audit quality. Finally, the impact of corporate governance on contagion effects is investigated. Significant negative cumulative abnormal returns are found among foreign issuers listed in Taiwan, which suggests these firms are affected by the fraudulent event of Pharmally.

Authors

• Wu-Po Paul Liu, National Cheng Kung University

• Mengyu Ma, University of Central Arkansas

• Hung-Wei Tseng, National Cheng Kung University

• Wan-Ci Huang, National Cheng Kung University