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The spillover effect of corporate frauds and stock price crash risk

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  • Wen, Fenghua
  • Lin, Diyue
  • Hu, Lei
  • He, Shaoyi
  • Cao, Zhiling

Abstract

This paper examines the spillover effect of corporate frauds on interlocked firms that share at least one director with the fraudulent firms. We document a reduction of stock price crash risk of interlocked firms following the frauds. Our findings imply that the spillover effect is mainly motivated by the experiences that interlocked directors learned during frauds. Furthermore, we show that frauds have a stronger effect on the stock price crash risk when interlocked firms are exposed to higher levels of information asymmetry and industry-level competition. We find no evidence that the busyness of the interlocked directors affects the spillover effect.

Suggested Citation

  • Wen, Fenghua & Lin, Diyue & Hu, Lei & He, Shaoyi & Cao, Zhiling, 2023. "The spillover effect of corporate frauds and stock price crash risk," Finance Research Letters, Elsevier, vol. 57(C).
    • Handle: RePEc:eee:finlet:v:57:y:2023:i:c:s1544612323005573
    DOI: 10.1016/j.frl.2023.104185
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    More about this item

    Keywords

    Corporate fraud; Stock price crash risk; Spillover effect; Interlocked director;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G40 - Financial Economics - - Behavioral Finance - - - General

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