Spillover effect of peer earnings quality on systematic risk of Brazilian companies

This study aims to analyze the spillover effect of earnings quality in economically related companies on company systematic risk in the Brazilian stock market. Although studying the spillover effect of aspects in the financial report on related companies has been the focus of recent international research, the same is not observed in Brazil. Also, according to Xing and Yan (2019), the relationship between accounting information quality and systematic risk has been the least common type of research when observing the effects of accounting information on cost of capital. This study is relevant for accounting regulators, given the possible spillover effect of their standards; for investors, considering their limited ability to analyze multiple companies simultaneously, to consider sample analysis; for preparers, to evaluate their practices, considering peer company quality. It contributes to the literature on accounting regulation, accounting information quality, and cost of capital by providing evidence of the scope of accounting information effects and their economic consequences. Earnings quality was measured according to Dechow and Dichev (2002) and Pae (2005). Systematic risk was measured by the market beta of the CAPM model. Panel regressions were performed with data from 2011 to 2022, with 2 sector samples. Company systematic risk depends not only on its own earnings quality, but also on peer earnings quality, i.e. there is a spillover effect in Brazil and its magnitude is greater than that of company earnings quality. Company systematic risk is negatively associated with peer earnings quality and with its earnings quality measured according to Dechow and Dichev (2002); but not when measured according to Pae (2005).