When an industry peer is accused of misconduct: contagion vs. competition effects on blameless firms

Recent research on corporate misconduct has revealed that a firm’s misconduct can generate negative consequences to blameless firms in its industry. In turn, research on competitive dynamics suggests that such misconduct can benefit competitors of the accused industry peer. Our study seeks to reconcile these two opposing perspectives by advancing theory and demonstrating how the market value of blameless firms is dually shaped by the aforementioned contagion and competition effects. Using fine-grained product data, we analyze the stock market returns of 233 software firms following reports of misconduct by their industry peers. We demonstrate that the negative contagion effect increases with the product market overlap between the accused and blameless firm, but only up to a point, beyond which the positive competition effect becomes dominant. We further show that the competition effect becomes more pronounced relative to the contagion effect, the more refined the definition of market overlap. Our study contributes to understanding the contagion and competition effects of misconduct by industry peers, and carries important implications for the management and stakeholders of blameless firms that may lose or gain from an industry peer’s misconduct.