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

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.

Automated summary

This study examines the influence of firms' geographical location on their behavior and the role of corporate social responsibility (CSR) and product market competition. The findings suggest that firms with strong CSR do not mimic their local peers' fraudulent behavior, while firms operating in competitive industries imitate unethical behavior. The study also reveals that fraudulent peer effects are more prevalent in small firms, young firms, and those with low institutional ownership. Stakeholders should pay more attention to firms operating in areas where misconduct is widespread.