Rajib Doogar

The Riskiness of Large Audit Firm Client Portfolios and Changes in Audit Liability Regimes: Evidence from the U.S. Audit Market

We investigate whether the financial riskiness of large US audit firm clienteles varied with the changing audit litigation liability environment during the period 1975-1999. Partitioning the period of study into four distinct periods [a benchmark period (1975-1984), a period of increasing concerns about litigation liability (1985-1989), a period of lobbying for reform (1990-1994) and a post-relief period (1995-1999)], we find some evidence of risk decreases during 1985-1989, strong evidence of risk decreases during 1990-1994 and strong evidence of risk increases during 1995-1999. However, we also find that over the period of our study, a time during which Big Six market shares grew appreciably, the proportion of litigious-industry clients in Big Six client portfolios grew at about the same rate as the proportion of such clients in the population. Moreover, the Big Six share of the financially riskiest clients in the economy did not grow as fast as overall Big Six market share. In sum, while our evidence is consistent with the hypothesis that the riskiness of Big Six client portfolios responded to changes in the audit litigation liability environment, we find no systematic evidence of a race to the bottom or bottom fishing by these firms in a bid to increase their market shares.

The Riskiness of Large Audit Firm Client Portfolios and Changes in Audit Liability Regimes: Evidence from the U.S. Audit Market Discussion of "The Riskiness of Large Audit Firm Client Portfolios and Changes in Audit Liability Regimes: Evidence from the U.S. Audit Market"

We investigate whether the financial riskiness of large US audit firm clienteles varied with the changing audit litigation liability environment during the period 1975-1999. Partitioning the period of study into four distinct periods [a benchmark period (1975-1984), a period of increasing concerns about litigation liability (1985-1989), a period of lobbying for reform (1990-1994) and a post-relief period (1995-1999)], we find some evidence of risk decreases during 1985-1989, strong evidence of risk decreases during 1990-1994 and strong evidence of risk increases during 1995-1999. However, we also find that over the period of our study, a time during which Big Six market shares grew appreciably, the proportion of litigious-industry clients in Big Six client portfolios grew at about the same rate as the proportion of such clients in the population. Moreover, the Big Six share of the financially riskiest clients in the economy did not grow as fast as overall Big Six market share. In sum, while our evidence is consistent with the hypothesis that the riskiness of Big Six client portfolios responded to changes in the audit litigation liability environment, we find no systematic evidence of a race to the bottom or bottom fishing by these firms in a bid to increase their market shares.

Auditor Credibility Impairment Spillovers: Evidence from Three Andersen Engagements

Does bad news about one auditors conduct affect the credibility of all auditors? We examine auditee abnormal stock returns around twenty-five bad news events involving Arthur Andersen LLPs (Andersen) questionable audits of Waste Management, Sunbeam, and Enron. Of these twenty-five windows, twelve (including eight pre-Enron windows) exhibit significantly negative market-wide mean abnormal returns. Moreover, during these twelve windows, portfolios of low quality auditees are, on average, penalized significantly more than portfolios of high quality auditees. During windows related to SEC actions (probes, sanctions), Andersen, Other Big Five and non-Big Five auditees are strongly penalized. Disclosures about the details of accounting and auditing irregularities, on the other hand, more strongly affect Big Five auditees than non-Big Five auditees. Our study is the first to present systematic evidence that bad news about the conduct of one auditor can generate significant negative externalities (spillovers) to all auditors. Interestingly, all three events that show the strongest evidence of spillovers occur before Enrons financial troubles became public. During Enron-related events, by contrast, evidence for spillovers is mixed for both Andersen and non-Andersen auditees.Visiting Assistant Professor, University of Illinois (1998-2002). Assistant Professor, University of Notre Dame (1994-1998). Instructor, University of Notre Dame (1992-1994). Teaching Assistant, The Pennsylvania State University (1988-92). Research Assistant, Harvard Business School (summers, 1986-88). Partner, Doogar and Sethia, Chartered Accountants (1982-1985). Management Trainee, Majestic Packaging Co., (1981-2) Articled Clerk, S. S. Kothari & Co., Chartered Accountants, Calcutta, India (1978-81).

Measuring the Private Economic Benefits of R&D

The duration and magnitude of the private economic benefits obtained from firm-level R&D outlays are important to managers, investors and policy-makers. We present a modeling and estimation approach that facilitates reliable estimation of these benefits under mild a priori assumptions. Our estimates of R&D useful life and realized returns shed light on three important debates in the literature: Do firms invest optimally in R&D? Do investors entertain rational expectations about firm-level R&D benefits? Has the cost of R&D capital declined over time? We answer each of these questions in the affirmative. Further, our evidence indicates that conventional measures of R&D capital stock are grossly overstated.

Leverage and Audit Firm Mergers

We study what a simulated market of pure price competition reveals about market shares and per-partner profits in Big Six audit firm mergers for 1997. In the model of audit production we use, leverage (staff-to-partner ratio) reflects the productivity of an audit partner and is key to analyzing productivity changes that arise from merger. We model price competition among 270 firms and find that post-merger leverage improvement leads to increases both in market share and in per-partner profits. The rank of a merger on market-share increase is sensitive to alternative estimates of leverage, but the rank on per-partner profit increase is not. A merger involving Arthur Andersen generally ranks highest. Absent Arthur Andersen, we find that the 1998 merger between Price Waterhouse and Coopers & Lybrand produces higher per-partner profit increases than the failed merger between Ernst & Young and KPMG Peat Marwick.