The Market Reaction to Arthur Andersen's Shredding of Documents: Loss of Reputation or Confounding Effects?

32 Pages Posted: 20 Mar 2008

See all articles by Karen K. Nelson

Karen K. Nelson

Texas Christian University - Department of Accounting

Richard A. Price

University of Oklahoma

Brian Rountree

Rice University - Jesse H. Jones Graduate School of Business

Date Written: March 2008

Abstract

This paper tests the hypothesis that negative client stock returns following the revelation that Enron documents had been shredded are attributable to confounding effects as opposed to a loss of Andersen's reputation. We find that a sharp decline in oil prices along with a disproportionate share of energy clients combine to produce significantly more negative returns for Andersen clients relative to other Big 4 clients, and for Andersen's Houston office clients relative to its clients in other locations. Further, the returns of Andersen clients are no different from those experienced by Big 4 clients in nine out of ten industry sectors. Additional tests of earnings response coefficients reveal no change in the market's valuation of clients' earnings after the shredding announcement. Overall, we conclude the market reaction surrounding the shredding date is attributable to market-wide news events rather than the loss of Andersen's reputation.

Keywords: Auditor reputation, Arthur Andersen, Event studies, Earnings response coefficients

JEL Classification: G14, M41, M49

Suggested Citation

Nelson, Karen K. and Price, Richard A. and Rountree, Brian Robert, The Market Reaction to Arthur Andersen's Shredding of Documents: Loss of Reputation or Confounding Effects? (March 2008). Available at SSRN: https://ssrn.com/abstract=1108337 or http://dx.doi.org/10.2139/ssrn.1108337

Karen K. Nelson

Texas Christian University - Department of Accounting ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States
817-257-7567 (Phone)

Richard A. Price

University of Oklahoma ( email )

307 W Brooks
Norman, OK 73019
United States
405-325-5759 (Phone)

Brian Robert Rountree (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

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