The Contagion Effect of Accounting Restatements on Strategic Alliance Partners

We investigate restatement contagion to strategic alliance partners, and we document a negative stock price reaction for non-restating firms whose alliance partners announce an accounting restatement. We find that a non-restating alliance partner can mitigate this contagion effect by having a diverse network of alliances and/or having termination clauses in their alliance contracts. However, in contrast to the findings of Boone and Ivanov ([2012] Bankruptcy spillover effects on strategic alliance partners. Journal of Financial Economics, 103(3), 551–569. ), we find that forming joint ventures instead of contractual alliances does not offer protection from negative spillover effects from alliance partners’ restatements. We also find empirical support for both the accounting quality concern (information risk) and the economic outlook revision (information updating) mechanisms of restatement contagion. Taken together, our findings indicate that, despite the limited quantitative disclosure about alliances and a decrease in information about production decisions for alliance participants (Kepler, [2021]. Private communication among competitors and public disclosure. Journal of Accounting and Economics, 71(2-3), 101387. ), markets infer significant information about the contagion effects of restatements.