Audit Firm Reputation and Client Stock Returns: Evidence from Envelopegate
51 Pages Posted: 10 Sep 2018 Last revised: 31 Jan 2019
Date Written: January 23, 2019
We study market reaction to “Envelopegate,” a term coined by social media users to describe PwC’s error made during the 2017 Academy Awards, where a PwC partner handed Warren Beatty the wrong envelope prior to the announcement for “Best Picture.” The negative attention focused on PwC following the error was unprecedented; and we find that, relative to clients of other Big 4 CPA firms, PwC clients experienced lower stock returns on Oscars weekend and on the following Monday in 2017. Further, we show that the negative market reaction to Envelopegate is concentrated in companies for which the audit report is particularly valuable (e.g., companies with a high degree of information asymmetry between investors and management).
Keywords: auditor reputation; audit quality; organizational reputation; event study; expert intermediary
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