The Market Reaction to Arthur Andersen's Role in the Enron Scandal: Loss of Reputation or Confounding Effects?
Posted: 19 Dec 2008
Date Written: December, 18 2008
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 differences in the industry composition of the Andersen and Big 4 client portfolios combine to produce significantly more negative returns for Andersen clients relative to Big 4 clients, and for Andersen's Houston office clients relative to its clients in other locations. The market reaction to two other Enron-related events also offers little support for a reputation effect.
Keywords: Auditor reputation, Arthur Andersen, Event studies, Earnings response coefficients
JEL Classification: G14, G34, M41, M49
Suggested Citation: Suggested Citation