Auditor Reputation and the Insurance Hypothesis: The Information Content of Disclosures of Financial Distress of a Major Accounting Firm

摘要

This study assesses the audit-client firm-share price effects of 1) litigation-related bankruptcy rumors about Ernst & Young (E&Y) and 2) an advertisement placed by E&Y aimed at dispelling those rumors. The insurance hypothesis and/or the audit quality explanation justify the expectation of significant client-firm share-price reactions. We find limited empirical support that the bankruptcy rumors are associated with negative market responses for E&Ys clients. We also find a significant negative market reaction to an E&Y advertisement. Such a finding suggests that E&Y was unsuccessful at quelling the rumors of financial distress. The results of a cross-sectional regression indicate that audit quality is more important to the shareholders of smaller client firms. These results also suggest that auditor-supplied insurance is more important to shareholders of higher systematic risk client firms as measured by beta.