Local peers and firm misconduct: The role of sustainability and competition

• Published in: Economic modelling 2022-11, Vol.116, p.106000, Article 106000
• Main Authors: Rind, Asad Ali, Abbassi, Wajih, Allaya, Manel, Hammouda, Amira
• Format: Article
• Language: English
• Subjects: Competition; Corporate misbehavior; Corporate social responsibility; Peer effects; Sustainability
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2022.106000

Prior research shows that firms' geographical location is critical for financial decisions. However, it is still unclear whether firms mimic the unethical behavior of their local peers and whether firms' corporate social responsibility (CSR) and product market competition mitigate such behavior. We examine a US sample of 23,605 observations and find that firms' likelihood of misconduct is positively related to the average level of misconduct in the local metropolitan area. The analysis shows that firms with strong CSR do not mimic their local peers' fraudulent behavior. However, firms operating in industries with greater competition imitate their local peers’ unethical behavior. The channel analysis reveals that fraudulent peer effects are only prevalent in small firms, young firms, and those with low institutional ownership, suggesting that information asymmetry and weak monitoring drive our findings. The results also suggest stakeholders should pay more attention to firms operating in areas where misconduct is widespread. •US firms are likely to mimic the fraudulent behavior of their local peers.•Firms with strong CSR do not mimic their local peers' fraudulent activities.•Firms operating in industries facing intense competition imitate their local peers.•The fraudulent peer effects are exacerbated in the presence of information asymmetry and low monitoring.