Using a comprehensive sample of switches to and from the largest auditors (i.e., the Big N), we examine empirically whether the sensitivity of Big N auditor switches to client risk and misalignment changed between the pre- and post-Enron periods. Although we find an increase in the sensitivity to client misalignment, the sensitivity to client risk generally decreases. The results are consistent with Big N auditors rebalancing their audit client portfolios in response to post-Enron capacity constraints arising from the supply of former Arthur Andersen clients and the audit demands imposed by Sarbanes-Oxley rather than increasing their sensitivity to client risk. Additional evidence indicates that the Sarbanes-Oxley demand shock did not affect Big N auditor switching behavior incremental to the initial Andersen supply shock.

This paper presents empirical evidence that cash-flow volatility is negatively valued by investors. The magnitude of the effect is substantial with a 1% increase in cash-flow volatility, resulting in approximately a 0.15% decrease in firm value. We show that this increase, however, is not associated with earnings-smoothing resulting from managers" accrual estimates. Our results are consistent with a preference by the market for less volatile cash flows and suggest that managers' efforts to produce smooth financial statements add value, but only via the cash component of earnings.

This study examines former Arthur Andersen clients and provides evidence on the factors involved in their selection of new auditors after Andersen's collapse. Using a unique dataset that identifies whether former Andersen clients followed their audit team to a new auditor, findings reveal companies with greater agency concerns were more likely to sever ties with their former auditor, whereas those with greater switching costs were more likely to follow their former auditor. We also investigate the effect of the forced auditor change on financial statement quality in an effort to provide insight into the mandatory auditor rotation debate. Using performance-adjusted discretionary accruals as a proxy for reporting quality, our results fail to reveal significant improvements for companies with extreme discretionary accruals that severed ties with Andersen, which is inconsistent with the notion that mandatory rotation improves financial reporting.

No abstract

We examine how analysts respond to public information when setting stock recommendations. We model the determinants of analysts' recommendation changes following large stock price movements. We find evidence of an asymmetry following large positive and negative returns. Following large stock price increases, analysts are equally likely to upgrade or downgrade. Following large stock price declines, analysts are more likely to downgrade. This asymmetry exists after accounting for investment banking relationships and herding behavior. This result suggests recommendation changes are "sticky" in one direction, with analysts reluctant to downgrade. Moreover, this result implies that analysts' optimistic bias may vary through time.