IDEAS home Printed from https://ideas.repec.org/a/spr/jecfin/v29y2005i2p187-202.html
   My bibliography  Save this article

Accounting contagion: The case of Enron

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/BF02761553
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/BF02761553?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Saunders, Anthony & Smirlock, Michael, 1987. "Intra- and Interindustry Effects of Bank Securities Market Activities: The Case of Discount Brokerage," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(4), pages 467-482, December.
    2. Atiase, Rk, 1985. "Predisclosure Information, Firm Capitalization, And Security Price Behavior Around Earnings Announcements," Journal of Accounting Research, Wiley Blackwell, vol. 23(1), pages 21-36.
    3. Song, Moon H. & Walkling, Ralph A., 2000. "Abnormal returns to rivals of acquisition targets: A test of the 'acquisition probability hypothesis'," Journal of Financial Economics, Elsevier, vol. 55(2), pages 143-171, February.
    4. Fenn, George W. & Cole, Rebel A., 1994. "Announcements of asset-quality problems and contagion effects in the life insurance industry," Journal of Financial Economics, Elsevier, vol. 35(2), pages 181-198, April.
    5. Revsine, Lawrence, 2002. "Enron: sad but inevitable," Journal of Accounting and Public Policy, Elsevier, vol. 21(2), pages 137-145.
    6. Aharony, Joseph & Swary, Itzhak, 1983. "Contagion Effects of Bank Failures: Evidence from Capital Markets," The Journal of Business, University of Chicago Press, vol. 56(3), pages 305-322, July.
    7. Gayle R. Erwin & James M. Miller, 1998. "The Intra-Industry Effects Of Open Market Share Repurchases: Contagion Or Competitive?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 21(4), pages 389-406, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. 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.
    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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Xin Yu & Peng Zhang & Ying Zheng, 2015. "Corporate Governance, Political Connections, and Intra-Industry Effects: Evidence from Corporate Scandals in China," Financial Management, Financial Management Association International, vol. 44(1), pages 49-80, March.
    2. N. Kohers & T. Kohers, 2004. "Information sensitivity of high tech industries: evidence from merger announcements," Applied Financial Economics, Taylor & Francis Journals, vol. 14(7), pages 525-536.
    3. Eberhart, Allan C., 2001. "Comparable firms and the precision of equity valuations," Journal of Banking & Finance, Elsevier, vol. 25(7), pages 1367-1400, July.
    4. Chi, Li-Chiu & Tang, Tseng-Chung, 2008. "The response of industry rivals to announcements of reorganization filing," Economic Modelling, Elsevier, vol. 25(1), pages 13-23, January.
    5. Robert Schweitzer, 1989. "How do stock returns react to special events?," Business Review, Federal Reserve Bank of Philadelphia, issue Jul, pages 17-29.
    6. Chi, Li-Chiu, 2009. "Contagion and competitive effects of plan confirmation of reorganization filings: Evidence from the Taiwan Stock Market," Economic Modelling, Elsevier, vol. 26(2), pages 364-369, March.
    7. Chen, Chih-Chun & Chen, Chun-Da & Lien, Donald, 2024. "Transmission process and determinants of sovereign credit contagions: Global evidence," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 552-567.
    8. Aigbe Akhigbe & Jeff Madura & Anna Martin, 2015. "Intra-industry effects of negative stock price surprises," Review of Quantitative Finance and Accounting, Springer, vol. 45(3), pages 541-559, October.
    9. Tan Xu & Mohammad Najand & Douglas Ziegenfuss, 2006. "Intra‐Industry Effects of Earnings Restatements Due to Accounting Irregularities," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(5‐6), pages 696-714, June.
    10. Angelos Kanas, 2005. "Pure contagion effects in international banking: The case of BCCIÂ’s failure," Journal of Applied Economics, Universidad del CEMA, vol. 8, pages 101-123, May.
    11. Elijah Brewer & William E. Jackson, 2002. "Inter-industry contagion and the competitive effects of financial distress announcements: evidence from commercial banks and life insurance companies," Working Paper Series WP-02-23, Federal Reserve Bank of Chicago.
    12. Bradley, Daniel & Yuan, Xiaojing, 2013. "Information spillovers around seasoned equity offerings," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 106-118.
    13. Akhigbe, Aigbe & Madura, Jeff, 2001. "Why do contagion effects vary among bank failures?," Journal of Banking & Finance, Elsevier, vol. 25(4), pages 657-680, April.
    14. Elyasiani, Elyas & Mansur, Iqbal & Pagano, Michael S., 2007. "Convergence and risk-return linkages across financial service firms," Journal of Banking & Finance, Elsevier, vol. 31(4), pages 1167-1190, April.
    15. Jiang Cheng & Elyas Elyasiani & Tzu‐Ting Lin, 2010. "Market Reaction to Regulatory Action in the Insurance Industry: The Case of Contingent Commission," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(2), pages 347-368, June.
    16. Slovin, Myron B. & Sushka, Marie E. & Polonchek, John A., 1999. "An analysis of contagion and competitive effects at commercial banks," Journal of Financial Economics, Elsevier, vol. 54(2), pages 197-225, October.
    17. Ching-Chih Wu & Tung-Hsiao Yang, 2018. "Insider Trading and Institutional Holdings in Seasoned Equity Offerings," JRFM, MDPI, vol. 11(3), pages 1-14, September.
    18. James M. Carson & Elyas Elyasiani & Iqbal Mansur, 2008. "Market Risk, Interest Rate Risk, and Interdependencies in Insurer Stock Returns: A System‐GARCH Model," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(4), pages 873-891, December.
    19. Richard Cazier & Rosemond Desir & Ray J. Pfeiffer & Lumina Albert, 2020. "Intra-industry information transfer effects of leading firms’ earnings narratives," Review of Quantitative Finance and Accounting, Springer, vol. 54(1), pages 29-49, January.
    20. Danjue Clancey-Shang, 2022. "Information Spillovers Prior to M&A Announcements," JRFM, MDPI, vol. 15(10), pages 1-21, October.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:jecfin:v:29:y:2005:i:2:p:187-202. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.