Abstract
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.
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