Accounting Frauds and Investor Reactions Worldwide

Using events associated with high-profile U.S. accounting frauds, we examine investor reactions of more than 18,000 unrelated firms across 40 countries. These firms have no direct economic ties with the U.S. fraud firm whether at the firm, industry or country level. Yet, the stock price of unrelated firms decreases around the fraud events, particularly if the firms have higher accruals which makes them more prone to investor concerns about earnings overstatements. Examining how country-level characteristics shape investor reactions worldwide, we find that similarities in accounting and auditing standards to the U.S., social and legal institutions, and infrastructure facilitating news flows are significant enough to moderate or exacerbate the negative investor reactions. Overall, the findings highlight that accounting frauds can cause investor concerns globally, suggesting a worldwide impact that affects even unrelated firms. Analyses examining high-profile accounting frauds in countries outside of the U.S. confirm the global transmission of accounting concerns