Reputation or Confounding Effects? Intraday Evidence from the Collapse of Arthur Andersen

The collapse of Arthur Andersen presents a rare opportunity to isolate the valuation impact of auditor reputation on client firms. Prior studies using daily returns struggle to separate reputation effects from contemporaneous confounding events. We address this limitation by employing high-frequency intraday data to examine market reactions to Andersen's January 10, 2002 admission of document shredding and its March 14, 2002 criminal indictment. Within narrow [-5, +10] minute windows around each event, Andersen clients experienced statistically significant negative returns-12 basis points following the shredding admission and 11 basis points following the indictment-relative to clients of other Big N auditors. Cross-sectional analyses reveal that the shredding response is statistically significant only among smaller firms, those with longer Andersen tenure, lower ratios of audit to total fees, lower institutional ownership, and lower litigation risk. In contrast, the indictment response is statistically significant only among larger firms, those with shorter Andersen tenure, and higher litigation risk. While formal tests do not indicate statistically significant differences across these subsamples, the directional patterns are consistent with the view that the shredding event raised reputational concerns, whereas the indictment highlighted potential insurance losses. Our findings underscore the role of market discipline in penalizing audit failures and suggest that investor scrutiny complements regulatory oversight in promoting audit quality.