The Contagion Effects of Accounting Restatements

We predict and find that accounting restatements that adversely affect shareholder wealth at the restating firm also induce share price declines among non‐restating firms in the same industry. These share price declines are unrelated to changes in analysts' earnings forecasts, but instead seem to reflect investors' accounting quality concerns. Peer firms with high industry‐adjusted accruals experience a more pronounced share price decline than do low‐accrual firms. This accounting contagion effect is concentrated among revenue restatements by relatively large firms in the industry. We also find that investors impose a larger penalty on the stock prices of peer firms with high earnings and high accruals when peer and restating firms use the same external auditor. Our results are consistent with the notion that some accounting restatements cause investors to reassess the financial statement information previously released by non‐restating firms.