In this article we investigate the impact of the Enron audit failure on auditor reputation. Specifically, we examine Arthur Andersen’s clients’ stock market impact surrounding various dates on which Andersen’s audit procedures and independence were under severe scrutiny. On the three days following Andersen’s admission that a significant number of documents had been shredded, we find that Andersen’s other clients experienced a statistically negative market reaction, suggesting that investors downgraded the quality of the audits performed by Andersen. We also find that audits performed by Andersen’s Houston office suffered a more severe decline in abnormal returns on this date. We are not able to show that Andersen’s independence was questioned by the amount of non–audit fees charged to its clients.

A central requirement in the design of a legal system is the protection of law enforcers from coercion by litigants through either violence or bribes. The higher the risk of coercion, the greater the need for protection and control of law enforcers by the state. Such control, however, also makes law enforcers beholden to the state, and politicizes justice. This perspective explains why, starting in the twelfth and thirteenth centuries, the relatively more peaceful England developed trials by independent juries, while the less peaceful France relied on state-employed judges to resolve disputes. It may also explain many differences between common and civil law traditions with respect to both the structure of legal systems and the observed social and economic outcomes.

We investigate a pervasive voluntary disclosure practice—managers including balance sheets with quarterly earnings announcements. Consistent with expectations, we find that managers voluntarily disclose balance sheets when current earnings are relatively less informative, or when future earnings are relatively more uncertain. Specifically, balance sheet disclosures are more likely among firms: (1) in high technology industries; (2) reporting losses; (3) with larger forecast errors; (4) engaging in mergers or acquisitions; (5) that are younger; and (6) with more volatile stock returns. This is consistent with managers disclosing balance sheets in response to investor demand for value relevant information to supplement earnings.

The negative effect of quits on the willingness of firms to provide on‐the‐job training is well documented in the theoretical literature. Here we explore the strength of this effect by solving a firm’s dynamic optimization problem where there is uncertainty about future productivity and nonzero firing costs. We find that the degree to which quit rates affect hiring depends on the ratio of firing to hiring costs. As this ratio rises, the negative effect of quits becomes less important, eventually reversing itself. We also describe how quit rates affect the firing decision. We highlight some testable implications of our analysis.

The creation of a number of very large and sometimes increasingly complex financial institutions, resulting in part from the on-going consolidation of the financial system, has raised concerns that the degree of systemic risk in the financial system may have increased. We argue that firm inter-dependencies, as measured by correlations of stock returns, provide an indicator of systemic risk potential. We analyze the dynamics of the stock return correlations of a sample of US large and complex banking organizations (LCBOs) over 1988–1999, and find a significant positive trend in stock return correlations. This finding is consistent with the view that the systemic risk potential in the financial sector appears to have increased over the last decade. In addition, we relate firms' return correlations to their consolidation activity by estimating measures of the consolidation elasticity of correlation. Consolidation at the sample LCBOs appears to have contributed to LCBOs inter-dependencies. However, consolidation elasticities of correlation exhibit substantial time variation, and likely declined in the latter part of the decade. Thus, factors other than consolidation have also been responsible for the upward trend in return correlations.

This paper examines changes in the information content of earnings over the past three decades using the two metrics from Beaver [1968]: abnormal trading volume and abnormal return volatility. We find no evidence of a decline in the information content of earnings announcements over the past three decades, as measured by both abnormal trading volume and return volatility around quarterly earnings announcements. If anything, our results suggest an increase over time in the informativeness of quarterly earnings announcements. Variables reflecting changes in firm‐specific factors account for a portion of the observed increase.

The relation of competition and cost accounting has been the subject of conflicting prescriptions, theories, and empirical evidence. Practitioner literature and textbooks argue that higher competition generally requires more accurate product costing. Theoretical economic analysis, in contrast, predicts that the optimal level of product-costing accuracy is sometimes higher at lower levels of competition. Results of survey research are inconsistent, suggesting a need for further identification of conditions under which higher competition leads to more accurate product costing. This study shows experimentally that individuals' choices of the level of product-costing accuracy depend not only on the current level of competition but also on the previous level of competition — that is, on an interaction between market structure (monopoly, duopoly, and four-firm competition) and market history (increasing versus decreasing competition). In the experiment, subjects decide on the quantity of data to collect at a pre-set price per datum to support more accurate product-cost estimates. Subjects collect the most cost data (i.e., choose the most accurate product costing) in monopoly, collect the least in duopoly, and an intermediate amount in the four-firm market, consistent with the pattern of optimal cost-data collection in Hansen's 1998 model. The process of convergence to the optimum differs significantly across market types and market histories, however. Subjects who begin in four-firm competition adapt more successfully to change than those who begin in monopoly. The lowest levels of decision performance occur when ex-monopolists face their first competitor: they overreact to this first encounter with competition and overspend on cost data.

The relation of competition and cost accounting has been the subject of conflicting prescriptions, theories, and empirical evidence. Practitioner literature and textbooks argue that higher competition generally requires more accurate product costing. Theoretical economic analysis, in contrast, predicts that the optimal level of product‐costing accuracy is sometimes higher at lower levels of competition. Results of survey research are inconsistent, suggesting a need for further identification of conditions under which higher competition leads to more accurate product costing. This study shows experimentally that individuals' choices of the level of product‐costing accuracy depend not only on the current level of competition but also on the previous level of competition — that is, on an interaction between market structure (monopoly, duopoly, and four‐firm competition) and market history (increasing versus decreasing competition). In the experiment, subjects decide on the quantity of data to collect at a pre‐set price per datum to support more accurate product‐cost estimates. Subjects collect the most cost data (i.e., choose the most accurate product costing) in monopoly, collect the least in duopoly, and an intermediate amount in the four‐firm market, consistent with the pattern of optimal cost‐data collection in Hansen's 1998 model. The process of convergence to the optimum differs significantly across market types and market histories, however. Subjects who begin in four‐firm competition adapt more successfully to change than those who begin in monopoly. The lowest levels of decision performance occur when ex‐monopolists face their first competitor: they overreact to this first encounter with competition and overspend on cost data.

The last three decades have witnessed the rise of a pohtical gender gap in the United States wherein more women than men favor the Democratic party. We trace this development to the decline in marriage, which we posit has made men richer and women poorer. Data for the United States support this argument. First, there is a strong positive correlation between state divorce prevalence and the political gender gap—higher divorce prevalence reduces support for the Democrats among men but not women. Second, longitudinal data show that following marriage (divorce), women are less (more) likely to support the Democratic party.