This paper investigates the cost of going public through initial public offerings (IPOs) for firms located in regions with significant fraud density. We find that companies in regions with a high proportion of nearby firms that have committed corporate misconduct have more pronounced underpricing, experience higher post‐IPO stock return volatility, and are more likely to withdraw their offerings. Overall, our results show that local corporate misconduct is associated with the pricing of IPOs, and the breach of trust is related to costly IPOs for newcomers.

PurposePrior research has documented a guilt by association phenomenon whereby instances of corporate misconduct generate a negative spillover to innocent firms due to their shared industry membership with the wrongdoing firm. However, research on competitive dynamics predicts a positive spillover whereby some firms benefit from the revelation of financial misconduct by an industry peer. This study lends support to both these effects by highlighting the role product similarity plays in the understanding of investors' perceptions surrounding corporate misconduct.Design/methodology/approachThe study assesses the investors' valuation of cash using Faulkender and Wang's (2006) methodology. The difference-in-differences approach is employed to compare the market valuation of cash held by non-accused firms with higher and lower litigation spillover risk operating in industries with higher vs lower product similarity.FindingsThe findings show that an increase in the volume and severity of misconduct by industry peers is associated with an undeserved loss in the value of cash held by non-accused firms operating in industries with high product similarity. In contrast, firms that sell differentiated products stand to gain from the troubles of the accused peer. Moreover, non-accused firms in industries with high product similarity reduce capital expenditures more following misconduct accusations against peers to preserve cash in anticipation of future lawsuits.Originality/valueThis study contributes to the growing spillover literature that investigates how a crisis caused by one firm affects the valuation of its peers.

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Purpose The purpose of this paper is to examine whether cash flow volatility (CFV) has a negative impact on future stock returns, and whether the CFV-return relation is different among financially constrained and unconstrained firms, by using a broad sample of 21 developed markets. Design/methodology/approach The study conducts portfolio analysis to test the CFV effect on returns. Risk-adjusted returns (alphas) are computed with respect to country-specific factors based on market, size, book-to-market, and momentum. Findings The strategy of buying stocks with low CFV while shorting stocks with high CFV delivers significant alphas in more than three-fourths of the markets. The alphas for the long-short portfolio based on CFV are positive and statistically significant in more than 70 percent of the countries among financially constrained firms, largely driven by the underperformance of high-CFV stocks. In comparison, the CFV effect is observed in less than 45 percent of the countries among financially unconstrained firms, and is largely driven by the outperformance of low-CFV stocks. Originality/value This study extends prior findings by providing evidence of a negative relation between CFV and stock returns in a majority of global equity markets. The evidence also suggests an important role of financial constraints in explaining this relation.