The Market Reaction to Arthur Andersen's Role in the Enron Scandal: Loss of Reputation or Confounding Effects?

Posted: 19 Dec 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: December, 18 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 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

Nelson, Karen K. and Price, Richard A. and Rountree, Brian Robert, The Market Reaction to Arthur Andersen's Role in the Enron Scandal: Loss of Reputation or Confounding Effects? (December, 18 2008). Journal of Accounting & Economics (JAE), Vol. 46, No. 2-3, pp. 279-293, December 2008. Available at SSRN: https://ssrn.com/abstract=1317867

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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