Essays on Peer Effects in Financial Misreporting

This thesis is structured around three empirical analyses relating to peer effects in financial misreporting choices. The first study investigates peer effects among listed companies and shows that companies engage in real activities manipulation following peers’ choices. Apparently, companies perceive the benefits of misreporting higher than the corresponding costs, thus triggering a vicious circle in which the adoption of detrimental real practices is reinforced by peers’ use. However, additional analyses suggest that this imitative behaviour can be mitigated by imposing higher manipulation costs on firms. The second analysis examines peer effects in a sample of private firms. Results show the presence of peer influence in both income-increasing and income-decreasing real strategies, in line with private setting characteristics. Specifically, further tests highlight that, regardless of the direction of misreporting, firms address the pressure they are exposed to in a manner consistent with their reporting incentives. Finally, the third analysis examines income smoothing practices to determine if their spread among unlisted companies is due to mimicking behaviour. Empirical evidence indicates that peers’ choice is the main driver of income smoothing policy.