Client-firm market reaction to regulatory action against a major accounting firm

SelectedWorks Author Profiles:

Carl J. Pacini

Document Type


Publication Date


Date Issued

January 2003

Date Available

April 2014




This study assesses the audit client firm share price reactions to a disclosure that the California State Board of Accountancy considered revoking Ernst & Young's (E&Y) license to practice in California due to alleged gross negligence in the Lincoln Savings and Loan fraud scandal. The insurance hypothesis and/or the audit quality explanation justify the expectation of significant client-firm share price reactions. We find limited empirical support that the disclosure of the revocation event is associated with negative market responses for E&Y's clients. Results also indicate that auditor-supplied insurance and audit quality are more important for client firms experiencing financial distress, higher growth rates, and higher return variability.


Abstract only. Full-text article is available only through licensed access provided by the publisher. Published in Journal of Economics & Finance, 27(3), 279-299. Members of the USF System may access the full-text of the article through the authenticated link provided.




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Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.