Information Quality, Auditor Reputation and Capitalization Effects: The Legacy of Enron

Abstract

The purpose of this paper is to investigate the change in quality of the information environment pre- and post-Enron. We test whether the reputations of all auditors declined as a result of Enron. The impact on the market risk premium is also examined. An information processing model is developed to show that a structural break in information quality can produce a variety of outcomes for the responsiveness of the market to accounting information. We find that there was a fall in information quality post-Enron across all auditors. We also find that the Enron scandal, at least temporarily, adversely affected the market risk premium, confirming that information quality is part of systematic risk. These findings have obvious implications for the US audit industry, for accounting regulators and for the international competitiveness of US capital markets.

Keywords: Accounting information quality, Auditor reputation, Earnings-response-coefficients, Risk premium

JEL Classification: D82, G12, G14, M41, M49