Social responsibility and corporate reputation: The case of the Arthur Andersen Enron audit failure

We examine the influence of social responsibility ratings on market returns to Arthur Andersen (AA) clients following the Enron audit failure. Chaney and Philipich (2002) found that AA's loss of reputation resulted in negative market returns to AA clients following the Enron audit failure. Proponents of social responsibility argue that social responsibility can improve the reputation of the firm, while detractors argue that social responsibility expenditures are a poor use of shareholder money. If social responsibility sends a signal to investors regarding the reputation/ethics of management, social responsibility could mitigate the negative returns to AA clients following the Enron audit failure. Using a matched sample of AA and non-AA firms, we do not find evidence that social responsibility mitigated the negative returns to AA clients following the Enron audit failure. Our results are inconsistent with claims that social responsibility can burnish a firm's reputation in a time of crisis and with prior research indicating a positive relationship between social responsibility and market value.Social responsibility Corporate reputation Audit failure

The value relevance of the difference between nonfinancial and financial measures

Extant accounting research has focused on the value relevance of nonfinancial performance measures and financial performance measures separately. I examine the value relevance of the difference in those performance metrics. Specifically, I examine whether a difference in nonfinancial and financial information is an indicator of stronger or weaker future firm performance. Additionally, I examine whether the significant difference between nonfinancial and financial measures and future firm performance is related to the life cycle stage of the firm. Finally, I examine whether these differences have an impact on market participants' assessment of firm value. My results suggest that the difference between nonfinancial and financial performance measures is an indicator for future firm performance. Specifically, the higher the difference in performance measure the weaker the future performance of the firm. However, this difference is somewhat mitigated given the various life cycle of the firms. For the mature firms the difference between nonfinancial and financial measures serves as an indicator for future performance, while a firm in the early or growth stage the difference is not a strong indicator of future performance. Additionally, I find that market participants do not impound the difference between nonfinancial and financial measures into their assessment of firm value. This finding supports both proximity and transparency theory as it relates to how these differences are communicated to financial statement users. Given that the difference between nonfinancial and financial provides a signal of future performance suggests that a trading strategy may be implemented to earn future abnormal returns. I develop a trading strategy by taking a long (short) position in firms with a low (high) difference between their nonfinancial and financial performance measures and find significant positive abnormal returns. (Published By University of Alabama Libraries

The financial reporting and tax aggressiveness implications of schedule utp

In 2010, the Internal Revenue Service (IRS) announced the requirement to disclose uncertain tax positions (UTPs) on a new schedule (Schedule UTP) to be filed with federal corporate income tax returns. Schedule UTP requires companies to report line-item detail to the IRS of the aggregate disclosure requirement of uncertain tax benefits (UTBs) established by FIN 48 (KPMG 2010a). I examine firms’ change in reporting UTBs subsequent to the announcement of Schedule UTP. Overall, the results indicate firms reduce not only the levels of reported UTB, but they also significantly reduced the year to year changes in reported UTBs. Consistent with my predictions, firms which are required to file Schedule UTP earlier have an incrementally more significant reduction in reported UTBs. Results provide mixed evidence for financially conservative firms. Contrary to expectations, the decrease in reported UTBs is not incrementally more significant for firms in the upper quartile of tax aggressiveness. Additionally, I examine whether the announcement of Schedule UTP impacts other proxies for tax aggressive behavior. Results indicate that book-tax differences decrease subsequent to Schedule UTP. However, neither measure of tax aggressiveness based on effective tax rates provides statistically significant results. This finding suggests the decrease in reported UTBs is merely a change in reporting behavior and not a change in aggressive tax behavior. (Published By University of Alabama Libraries