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Does the market dole out collective punishment? An empirical analysis of industry, geography, and Arthur Andersen's reputation

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  • Huang, Roger D.
  • Li, Hang
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    Abstract

    Arthur Andersen's reputation was tarnished following news that its Houston office had shredded documents related to the auditing of energy giant Enron. Earlier studies documented widespread spillover of the reputation effect, suggesting a strong commonality in Big 5 audit practices. We examine whether the market is more discriminating in its assessments. We focus on the roles industry specialization of auditors and the geography of clients' audit offices play in accounting for the contagion. Our results are supportive of investors who differentiate audit practices by industry and who account for the location of the specific office where the audit work is done. We find that losses suffered by energy firms or firms located close to Houston are equivalent to approximately 90% of the aggregate abnormal losses suffered by Big 5 clients. Our evidence suggests the possibility of more localized impact of accounting scandals and supports accounting regulations targeted at individual industries.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 33 (2009)
    Issue (Month): 7 (July)
    Pages: 1255-1265

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    Handle: RePEc:eee:jbfina:v:33:y:2009:i:7:p:1255-1265

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Reputation spillover effect Audit practices and offices Industry specialization Geographic location;

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