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

36 Pages Posted: 6 Apr 2005  

Peter G. Dunne

Central Bank of Ireland

Haim Falk

The Technion, Israel Institute of Technology

John Forker

Queen's University Management School

Ronan Powell

University College Dublin (UCD) - Michael Smurfit Graduate School of Business

Date Written: April 2005

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

Suggested Citation

Dunne, Peter G. and Falk, Haim and Forker, John and Powell, Ronan, Information Quality, Auditor Reputation and Capitalization Effects: The Legacy of Enron (April 2005). Available at SSRN: https://ssrn.com/abstract=700069 or http://dx.doi.org/10.2139/ssrn.700069

Peter G. Dunne (Contact Author)

Central Bank of Ireland ( email )

P.O. Box 559
Dame Street
Dublin, 2
Ireland

Haim Falk

The Technion, Israel Institute of Technology ( email )

Faculty of Industrial Engineering & Management
Haifa 32000
ISRAEL
+972 4 829 4419 (Phone)

John Forker

Queen's University Management School ( email )

25 University Square
Belfast, Northern Ireland BT7 1NN
Northern Ireland

Ronan G. Powell

University College Dublin (UCD) - Michael Smurfit Graduate School of Business ( email )

Blackrock, Co. Dublin
Ireland

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