Abstract
SUMMARY In this study, we examine the reaction of financial analysts to the events associated with the collapse of Enron and Arthur Andersen. We present evidence that the change in the frequency of downward revisions from the pre-Enron to Enron period was incrementally higher for Andersen clients than for a control sample of matched Big 4 clients. We also find evidence that Andersen clients had incrementally larger forecast errors and greater forecast dispersion than the matched control firms. Our results suggest that the damaging news about Andersen led to an abnormal increase in uncertainty about other Andersen-audited financial statements, which affected analysts' forecast activity and properties. More generally, our results suggest that analyst behavior is tempered by the analyst's perception of audit quality.
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