Auditor's Reputation, Equity Offerings, and Firm Size: The Case of Arthur Andersen

We study the impact of Arthur Andersen's declining reputation on their clients. When Andersen clients issue seasoned equity, we find that the negative reaction to SEO announcements is two percent worse for SEOs audited by Andersen versus other Big Five firms. A median firm in our sample loses $31.4 million more than a non-Andersen client. This result supports the argument that the certifying and monitoring role of auditors is valuable to clients. We do not find any unusual underpricing for SEOs or for IPO firms audited by Arthur Andersen. However, we do find that Andersen clients suffered significant value losses (approximately two percent) surrounding two key events: the admission of error by Andersen's CEO and the announcement of the criminal indictment against Andersen. We find that these results are driven by the large firms in our sample implying that only large firms' stock is affected by the deteriorating reputation of Andersen.