Stock price contagion effects through investment banks

Yanan Zhang and Bing Zhu

Applied Economics, 2021, vol. 53, issue 50, 5793-5811

Abstract: This paper investigates how stock market investors react to non-fraudulent firms that share the same investment bank with fraudulent companies. Using a Chinese sample from the period of 2003 to 2018, we find that firms penalized for IPO or M&A fraud induce stock price declines among non-fraudulent firms which share the same investment banks (non-fraudulent contagion firms). The results also show that stock price declines are more pronounced for low-quality investment banks, and investors impose larger penalties on stock prices when non-fraudulent client firms are of lower earnings quality, weaker corporate governance, and higher information asymmetry. Furthermore, we demonstrate that the non-fraudulent contagion firms are more likely to commit accounting fraud and exhibit inferior long-term post-IPO/post-M&A performance. Overall, the findings indicate an important stock price contagion effect occurring at the investment bank level.

Date: 2021
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DOI: 10.1080/00036846.2021.1931004

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