(How) Do Firms Respond to Rivals’ Corruption? Evidence from Financial Misstatements

This study examines whether the actions of corrupt firms affect peer firms’ financial misstatements. Using data on violations of the U.S. Foreign Corrupt Practices Act, I find that peer firms misstate their financial statements and increase their earnings during the years in which corrupt rivals bribe foreign officials to gain unfair performance advantages. The likelihood of such income-increasing misstatements is higher when non-bribing peers experience loss of income due to bribing rivals’ unfair gains, and when financial analysts compare bribing firms and non-bribing peers’ performance. These findings suggest that competitive disadvantage and relative performance evaluation pressure result in spillovers from one type of corporate misconduct (bribery) to another (financial misstatements). By documenting the spillover effects from corporate misconduct, I contribute to the limited evidence of externalities from corporate behavior, and provide new insights into how firms’ misconduct spreads.