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Accounting contagion: The case of Enron

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  • Aigbe Akhigbe
  • Jeff Madura
  • Anna Martin

Abstract

The Enron scandal offers the opportunity to assess the degree to which misleading accounting can affect connected firms and industry rivals. While the market was inept at detecting the inaccuracy of Enron’s financial statements, it swiftly punished many connected firms once Enron's faulty accounting was publicized. A cross-sectional analysis documents that the market punished connected firms that had greater exposure to Enron’s business, whose financial statements were viewed as more complex, and that had greater financial leverage. Most of the negative news indicating concern with Enron’s accounting corresponded with a significant decline in the stock prices of firms in the energy and natural gas (ENG) industry, regardless of an explicit connection to Enron. Furthermore, rival firms with direct exposure to Enron and more aggressive earnings-reporting methods also experienced more detrimental effects. Copyright Springer 2005

Suggested Citation

  • Aigbe Akhigbe & Jeff Madura & Anna Martin, 2005. "Accounting contagion: The case of Enron," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 29(2), pages 187-202, June.
    • Handle: RePEc:spr:jecfin:v:29:y:2005:i:2:p:187-202
    DOI: 10.1007/BF02761553
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    References listed on IDEAS

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    Cited by:

    1. Michele Fabrizi & Xing Huan & Antonio Parbonetti, 2021. "When LIBOR becomes LIEBOR: Reputational penalties and bank contagion," The Financial Review, Eastern Finance Association, vol. 56(1), pages 157-178, February.
    2. Frendy, & Hu, Dan, 2014. "Japanese stock market reaction to announcements of news affecting auditors’ reputation: The case of the Olympus fraud," Journal of Contemporary Accounting and Economics, Elsevier, vol. 10(3), pages 206-224.
    3. Donnelly, Ray, 2008. "Accounting, board independence and contagion effects from adverse press comment: The case of Elan," The British Accounting Review, Elsevier, vol. 40(3), pages 245-259.

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