The spillover effect of corporate misconduct to bystander firms: evidence from an emerging economy

Purpose Emerging crisis spillover research suggests that crisis spillover effects spread from one firm to another within an industry. Yet, this research remains unclear on the effect and contributing factors to the crisis spillover. We advance this research by examining two related questions: what is the effect of the misconduct of an accused firm on the performance of bystander firms within the same industry? How is this spillover effect affected by the organizational characteristics of the bystander firms? These research questions are put forth by drawing insights from the social categorization theory. Design/methodology/approach We used panel data (2010–2021), multivariate linear regression models based on CAR (±3), and the wavelet-transformed coherence (WTC) framework to examine dynamic spillover effects. Findings Our linear regression results show that product overlap, closer geographical proximity and political connections increase the negative spillover effect, measured by the duration of crisis spillover. Practical implications The findings of this study indicate that investors consider shared organizational characteristics as the basis for categorization. Managers should be aware that firms can be affected without even being involved in any misconduct from the stigma spillover of bystander firms in a similar industry. In addition to looking for crisis management strategies, managers should focus on the characteristics that could extend the negative effects of the accused firm's misconduct on their performance. Originality/value This study advances crisis spillover research by theorizing and empirically demonstrating that spillover effects are fundamentally shaped by categorical proximity between firms. By integrating social categorization theory, we show that investors rely on categorical cues to generalize misconduct from an accused firm to similar bystanders, thereby extending category-based inference mechanisms to the domain of corporate misconduct. In doing so, we extend the social categorization theory by moving beyond prior descriptive accounts of spillovers and providing a theoretically grounded explanation for heterogeneity in their magnitude and duration, identifying key boundary conditions under which category-based contagion is more likely to occur.