The market reaction to Arthur Andersen's role in the Enron scandal ...

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The market reaction to Arthur Andersen's role in the Enron scandal ...

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• Publié par: edyxolec
• Nombre de lectures: 243
• Langue: English

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PRINSESTRAELCI 08)26(209379–2

The market reaction to Arthur Andersen’s role in the Enron scandal: Loss of reputation or confounding effects? $ Karen K. Nelson, Richard A. Price, Brian R. Rountree  Jones Graduate School of Management, Rice University, Houston, TX 77005, USA

a r t i c l e i n f o Article history: Received 18 March 2008 Received in revised form 15 September 2008 Accepted 15 September 2008 Available online 21 September 2008 JEL classification: G14 M41 M49 Keywords: Auditor reputation Arthur Andersen Event studies Earnings response coefficients

1. Introduction A recent widely cited study by Chaney and Philipich (2002) (hereafter CP) utilizes damaging revelations regarding Arthur Andersen’s role in the accounting fraud at Enron to assess the client valuation implications of a loss of auditor reputation. The study finds that Andersen clients experienced significant negative stock market reactions over a 3-day period beginning January 10, 2002, the date Andersen publicly acknowledged its employees had destroyed documentation related to the Enron audit. Moreover, clients of Andersen’s Houston office, where the alleged incidents at Enron occurred, suffered a larger stock price drop than the firm’s non-Houston clients. The evidence suggests the cumulative loss of Andersen clients was in excess of $10 billion in market capitalization during this 3-day window, which CP interprets as the client valuation effect attributable to Andersen’s damaged reputation. 1 However, CP does not control for concurrent negative news events that could explain these results. As with any event study analysis, it is imperative to isolate the effect of the event being studied (e.g., Dyckman et al., 1984 ). Our review of several major news sources reveals that negative macroeconomic and industry-related news was

a b s t r a c t 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. & 2008 Elsevier B.V. All rights reserved.

Contents lists available at ScienceDirect Journal of Accounting and Economics journal homepage: www.elsevier.com/locate/jae

$ We appreciate the helpful comments and suggestions of Jerry Zimmerman (the editor), Michael Willenborg (the referee), Jennifer Blouin, Gustavo Grullon, Wayne Landsman, James Weston, and workshop participants at Southern Methodist University and Texas Tech University. Srinivasan Krishnamurthy, Jian Zhou, and Nan Zhou generously provided some of the data for this study.  Corresponding author. E-mail address: [e-mail] (B.R. Rountree). 1 We derive this figure by multiplying the mean 3-day loss of $37,115,000 (CP, Table 8) by 284 Andersen clients (CP, Table 5 ). 0165-4101/$ - see front matter & 2008 Elsevier B.V. All rights reserved. doi: 10.1016/j.jacceco.2008.09.001

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