Auditor Reputation,Auditor Independence,and the Stock‐Market Impact of Andersen's Indictment on Its Client Firms*

In this paper, we study a broad sample of Arthur Andersen clients and investigate whether the decline in Andersen's reputation, due to its criminal indictment on March 14, 2002, adversely affected the stock market's perception of its audit quality. Because these reputa‐tional concerns are more of an issue if an auditor's independence is impaired, we investigate the relationship between the abnormal market returns for Andersen clients around the time of the indictment announcement and several fee‐based measures of auditor independence. Our results suggest that when news about Andersen's indictment was released, the market reacted negatively to Andersen clients. More importantly, we find that the indictment period abnormal return is significantly more negative when the market perceived the auditor's independence to be threatened. We also examine the abnormal returns when firms announced the dismissal of Andersen as an auditor. Consistent with the audit quality explanation, we document that when firms quickly dismissed Andersen, the announcement returns are significantly higher when firms switched to a Big 4 auditor than when they either switched to non‐Big 4 auditors or did not announce the identity of the replacement auditor. Our empirical results support the notion that auditor reputation and independence have a material impact on perceived audit quality and the credibility of audited financial statements, and that the market prices this.     

The Predictive Power of Internet-Based Product Concept Testing Using Visual Depiction and Animation

One critical step in new product development is selecting from among multiple possible product concepts the one that the firm will carry forward into the marketplace. There is a need for low‐cost, parallel testing of the appeal of new product concepts, the results of which closely mirror ultimate market performance. In this article, the authors first describe an Internet‐based product concept testing method they developed that incorporates virtual prototypes of new product concepts, substituting them for physical prototypes. The method can be used with either static representations of the products or with dynamic representations that demonstrate how the product works through a simulated video clip of its operation. The objective of this method is to allow design teams to select the best of several new concepts within a product category with which to proceed, without having to develop physical prototypes. The authors then provide a rigorous test of both virtual prototype methods against tests using both physical prototypes and attribute‐only (i.e., no visuals), full‐profile conjoint analysis. Nine concepts compete against two actual products in the tests. Market shares from the test using the physical prototypes are defined as the “actual” market shares. Predicted market shares for the attribute‐only, full‐profile conjoint analysis and each of the two virtual prototype methods are compared to those obtained for the physical prototypes. Both static and animated virtual prototype tests produced market shares that closely mirrored those obtained with the physical products, outperforming the set of predictions across the full range of products produced in the attribute‐only conjoint analysis. Interestingly, the attribute‐only conjoint analysis identified the top three products, in correct order. It was unable to differentiate performance below these top three products. Furthermore, it predicted market shares for the top three products to be well below those achieved using physical prototypes. As virtual prototypes cost considerably less to build and test than their physical counterparts, design teams using Internet‐based product concept research may be able to afford to explore a much larger number of concepts. Virtual prototypes and the testing methods associated with them may help reduce the uncertainty and cost of new product introductions by allowing more ideas to be concept tested in parallel with target consumers.     

Graphical analysis and financial classification: A case study

This paper illustrates the use of graphical analysis as a complementary diagnostic tool in financial classification problems. For more than two decades statistical models have been used frequently to understand the information content of multivariate data in the context of financial classification. These statistical classification models can be complemented by the use of computer-generated multidimensional data displays and graphical analysis. We illustrate the use of the scatterplot matrix, which is the simplest and very effective form of graphical analysis on a sample of bankrupt and non-bankrupt firms. The paper demonstrates the complementary nature of the scatterplot matrix for tree-structured classification models.     

Corporate governance when founders are directors

We examine chief executive officer (CEO) compensation, CEO retention policies, and mergers and acquisition (M&A) decisions in firms in which founders serve as a director with a nonfounder CEO (founder-director firms). We find that founder-director firms offer a different mix of incentives to their CEOs than other firms. Pay-for-performance sensitivity for nonfounder CEOs in founder-director firms is higher and the level of pay is lower than that of other CEOs. CEO turnover sensitivity to firm performance is also significantly higher in founder-director firms compared with nonfounder firms. Overall, the evidence suggests that boards with founder-directors provide more high-powered incentives in the form of pay and retention policies than the average US board. Stock returns around M&A announcements and board attendance are also higher in founder-director firms compared with nonfounder firms.     

Non-audit services and financial reporting quality: evidence from 1978 to 1980

We provide evidence on the long-standing concern about the potential conflicts of interest of auditors that provide clients with non-audit services using rarely explored non-audit services fee data from 1978 to 1980. In this setting, we find evidence of improved earnings quality when auditors provide non-audit services, especially those related to information services. This is consistent with better audit quality resulting from knowledge spillovers in the joint offering of audit and consulting services. Events related to the 1982 repeal of mandatory non-audit services disclosures are associated with a small positive stock price reaction, suggesting that the disclosure repeal has no adverse economic consequences. Furthermore, following the repeal we find no change in the earnings quality of client firms. In sum, our data suggest that non-audit services offered by audit firms can be associated with improved audit and reporting quality in client firms via auditors’ reputational incentives, synergies, and knowledge transfers.     

Factors influencing mentors’ learning from mentoring relationships: insights from a serial mediation study in India

The primary objective of the present study is to understand mentoring relationships in Indian organizations from the mentors’ perspective. In particular, the study examines whether the learning goal orientation of a mentor can significantly influence the mentoring process and outcomes for the mentor in a mentoring relationship. Two hundred and thirty‐six participants were selected using purposive sampling. Data were gathered using standardized questionnaires. Mediating effects were investigated using the PROCESS model by Hayes, Introduction to Mediation, Moderation, and Conditional Process Analysis: A Regression Based Approach. The results indicate high levels of support for several hypotheses examining the direct effects of learning goal orientation on willingness to engage by the mentor, mentoring functions provided and mentor outcomes (personal learning and self enhancement). The overall findings of the study suggest that mentors are not only ‘providers’ but also ‘receivers of learning’. Limitations and directions for future research are also discussed in the paper.     

Asset specificity,firm heterogeneity and capital structure

This paper presents an empirical investigation of the importance of specialized assets and other unique characteristics of a firm in explaining the variance in capital structure across firms. The results show that firm-specific effects contribute most to the variance in leverage, suggesting a strong link between strategy and capital structure.     

Opportunistic monetary policy: An alternative rationalization

This paper offers an alternative rationalization for opportunistic behaviour, i.e., a gradual disinflation strategy where policymakers react asymmetrically to supply shocks, opting to disinflate only in recessionary period. Specifically, we show that adaptive expectations combined with asymmetry in the Phillips curve of a specific sort together provide an optimizing justification for opportunism. However, the empirical basis for these conditions to be satisfied in the current low-inflation context of most OECD countries remains however to be established.