I investigate an externality of material financial misstatements by examining how these misstatements affect peer firms' real operating decisions during the periods of misreporting. I propose that a misreporting firm's peer firms will be misled by false accounting information and as a result will make unusual or distorted operating decisions. Using a sample of firms subject to SEC and DOJ enforcement actions for accounting misstatements as my misstating-firm sample, I find that peer firms of these misstating firms have unexpectedly high expenditures in fixed assets, R&D, and customer acquisition, but experience unexpectedly low gross profit in the misstatement period. The evidence is consistent with the notion that peer firms attempt to maintain or improve their product market performance rather than focus on short-term financial performance in the misstatement period. Finally, I find that the effect of misstatements on peer firms' operating decisions is negatively related to the relative size of peer firms to misstating firms.