Decomposing the Spillover Effects of Financial Restatements on Corporate Investment

ABSTRACT A firm's financial disclosures can (i) influence its own investment (own‐firm effects), (ii) influence peers’ investment directly through the information they convey (contextual peer effects), and (iii) influence other firms indirectly through a chain of strategic investment responses that propagate through the network (endogenous peer effects). Each channel carries distinct implications for disclosure economics, making it essential to quantify its relative influence. We employ a network‐based empirical design and financial restatements within a unified framework that addresses well‐known challenges in estimating peer effects. We find that firms’ investment decisions are tightly linked to their own disclosures. Moreover, disclosure‐induced investment spillovers operate predominantly through the endogenous channel (peers’ strategic investment responses that propagate through the network) while direct informational spillovers (contextual effects) are economically modest at most. Our estimates of the magnitudes of all three channels differ considerably from prior research, thereby altering the understanding of how financial reporting quality relates to investment.