The market response to information quality shocks: the case of Enron

Dunne, Peter G, Falk, Haim, Forker, John and Powell, Ronan (2008) The market response to information quality shocks: the case of Enron. Applied Financial Economics, 18 (13). pp. 1051-1066. ISSN 0960-3107

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Abstract

Relying on the market to provide incentives that would bring about optimal information quality is potentially a cost effective alternative to regulatory oversight. However, this depends on the ability of the market to recognize and price this attribute. In this article, we gain insights into the disciplinary role of the market by examining its response to Enron-related accounting scandals. We report evidence that information quality was in decline, leading upto the Enron-related scandals, but that the market was not sensitive to this decline. We confirm, however, that there was an abrupt decline in perceived information quality post-Enron. Furthermore, using an ex-ante methodology we provide strong evidence that auditor reputations were differentially affected by the scandals. We also find evidence that the Enron-related scandals adversely affected the market risk premium implying that information quality is part of systematic risk. Our results indicate that the market was operating effectively in recognizing lower quality information through an auditor reputation effect prior to the Sarbanes-Oxley Act. This calls into question the need for regulation to address the perceived deficit in information quality.

Item Type: Article
Schools and Departments: School of Business, Management and Economics > Business and Management
Subjects: H Social Sciences > HB Economic theory. Demography > HB0071 Economics as a science. Relation to other subjects
Depositing User: Catrina Hey
Date Deposited: 21 Jan 2013 14:49
Last Modified: 21 Jan 2013 14:49
URI: http://sro.sussex.ac.uk/id/eprint/43504
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