Corporate peer effects mean that corporate policies are influenced by the characteristics and actions of other firms in the reference group. It is generally recognized that managerial peer learning is the main driving factor of corporate peer effects, but it is questionable whether such a behavior of peer learning is rational. 　　We find that misstated financial statements paint a picture of rosy industry prospects that leads peer firms to make unexpected or distorted decisions. Furthermore, the magnitude of the distortion varies predictably with peer firms’ characteristics. Specifically, first of all, industry competition intensifies peer firms’ wrong response to industry leaders’ fraudulent financial reporting. Second, there exists a negative relationship between the response of peer firms and industry prosperity. The capital expenditure level of peer firms is higher in economic downturn than in economic prosperity. In addition, peer firms in the life cycle of a growing industry are more likely to be affected by the fraudulent financial reporting of industry leaders, exhibiting higher investment expansion. These results show that fraudulent financial reporting not only reduces the investment efficiency of the firm itself, but also leads to irrational investment in the whole industry, and the degree of influence varies with the industry attributes of peer firms.　　This paper makes the following contributions to the exiting literature. First, we investigate the spillover effects of fraudulent financial reporting from the perspective of industry characteristics, which helps to understand the internal mechanism of peer effect formation and provides new empirical evidence for the negative economic consequences of financial fraud. Second, we find that fraudulent financial reporting by industry leaders will distort investment decisions of peer firms. It’s important for the company management to pay attention to screening peer financial information to optimize investment decisions. At the same time, exploring the differences of spillover effects in different industries can help regulators to identify which industries are most affected by negative externalities of fraudulent financial reporting.