Bad news has wings: how industry and geographic peers’ financial misconduct influence stock price crash risk

Purpose Prior research has found two interorganizational spillover effects of financial misconduct: a stigma effect and a competition effect, yet little is known about the heterogeneous spillover consequences among different types of peer firms. This study investigates the disparate spillover effects of the financial misconduct of industry peers versus geographic peers on the stock price crash risk of non-accused firms. Design/methodology/approach The authors use panel regression models to examine this study’s research questions and address endogeneity concerns using the propensity score matching method and Heckman two-stage models. Findings The authors find that accusations of financial misconduct by industry peers tend to generate a competition effect that mitigates the crash risk of non-accused firms, whereas geographic peers’ financial misconduct may engender a stigmatizing effect that exacerbates the crash risk of non-accused firms. Cross-sectional analyses further demonstrate that the competition effect is more pronounced for non-accused firms that have a higher likelihood of replacing their accused industry peers. Meanwhile, the stigma effect is enhanced for non-accused firms with a local CEO or nearby accused peers. Moreover, investor attention to accused peers amplifies spillovers from both industry and geographic peers. Originality/value This study highlights the heterogeneous spillover consequences of financial misconduct by considering different types of peer relationships. The results contribute to the literature on interorganizational spillover and the consequences of corporate misbehavior.