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.
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