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The Effect of Auditor Reputation on Stock Returns - the Case of Arthur Andersen

We examine the consequences for the stock price movement of Andersen's German clients of several news events during the Enron crisis that were potentially damaging to the reputation of Enron's auditor Andersen. It seems to be likely that there may not only have been reputation-damaging effects of the selected events for the US arm of Andersen but also negative reputation spillovers to Andersen's worldwide organisation. Contrary to the results of several US-studies there is no indication of significant negative average abnormal returns around the announcement of the shredding of Enron-related documents by Andersen in January 2002. However, our empirical evidence suggests that the share prices of Andersen's German clients were on average negatively affected by the event in December 2001 when Andersen's CEO Berardino admitted an error in judgement concerning the Enron audit in the US-Congress. Our results further suggest that in Germany the other Top Tier auditors' reputation was negatively affected by the Andersen specific event in December 2001 as well, although to a lesser extent than Andersen's reputation. However, contrary to Andersen's reputation, it seems as if the other Top Tier auditors' reputation suffered an additional erosion around the announcement of the indictment against Andersen in March 2002.