This study assesses the audit client firm share price reactions to a disclosure that the California State Board of Accountancy considered revoking Ernst & Young's (E&Y) license to practice in California due to alleged gross negligence in the Lincoln Savings and Loan fraud scandal. 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 disclosure of the revocation event is associated with negative market responses for E&Y's clients. Results also indicate that auditor-supplied insurance and audit quality are more important for client firms experiencing financial distress, higher growth rates, and higher return variability.
Client-firm market reaction to regulatory action against a major accounting firmFaculty Publications
Date IssuedJanuary 2003
Date AvailableApril 2014
PublisherSpringer New York LLC
Creative Commons LicenseCreative Commons Attribution-Noncommercial-No Derivative Works 4.0
Citation InformationPacini, C., & Hillison, W. (2003). Client-firm market reaction to regulatory action against a major accounting firm. Journal of Economics & Finance, 27(3), 279-299.