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SocialResponsibilityandCorporateReputation:ThecaseoftheArthurAndersenEnronAuditFailure

Abstract
WeexaminetheinfluenceofsocialresponsibilityratingsonmarketreturnstoArthurAndersen(AA)clients
followingtheEnronauditfailure.ChaneyandPhilipich(2002)foundthatAAslossofreputationresultedin
negativemarketreturnstoAAclientsfollowingtheEnronauditfailure.Proponentsofsocialresponsibility
arguethatsocialresponsibilitycanimprovethereputationofthefirm,whiledetractorsarguethatsocial
responsibilityexpendituresareapooruseofshareholdermoney.Ifsocialresponsibilitysendsasignalto
investorsregardingthereputation/ethicsofmanagement,socialresponsibilitycouldmitigatethenegative
returnstoAAclientsfollowingtheEnronauditfailure.UsingamatchedsampleofAAandnonAAfirms,we
donotfindevidencethatsocialresponsibilitymitigatedthenegativereturnstoAAclientsfollowingtheEnron
auditfailure.Ourresultsareinconsistentwithclaimsthatsocialresponsibilitycanburnishafirmsreputationin
atimeofcrisisandwithpriorresearchindicatingapositiverelationshipbetweensocialresponsibilityand
marketvalue.
KeyWords:Socialresponsibility,CorporateReputation,AuditFailure
JELCodes:G11,G14,G34,M14,M42

INTRODUCTION
Intodaysglobalandturbulentenvironmentcompanieshavebecomemoresensitivetothevalueof
theirreputation.Corporateaudiences,includinginstitutionalandindividualinvestors,consistentlyevaluatethe
reputationsoffirmswhenmakinginvestment,careerandproductchoices(Dowling1986).Inadditiontothe
firmsreputationinfluencinginvestors,ChaneyandPhilipich(2002)findthatthereputationofthefirms
auditorcanalsoinfluenceinvestors.Inparticular,ChaneyandPhilipich(2002)findthatArthurAndersen(AA)
clientssufferednegativeabnormalreturnsinthedaysfollowingAAsadmissionthattheyhadshredded
documentsrelatedtotheEnronaudit,andonthedaysfollowingthereleaseofthePowersReport.1
Inthispaper,weexaminetheinfluenceofsocialresponsibilityonfirmreputationduringaperiodof
crisis.Definitionsofsocialresponsibilitytypicallylinktheconstructofsocialresponsibilitytoincreasedethical
behavior.Forexample,WattsandHolme(1999)definesocialresponsibilityasfollows:"Corporatesocial
responsibilityisthecontinuingcommitmentbybusinesstobehaveethicallyandcontributetoeconomic
developmentwhileimprovingthequalityoflifeoftheworkforceandtheirfamiliesaswellasofthelocal
communityandsocietyatlarge".Proponentsofsocialresponsibilityclaimthatsocialresponsibilitysignals
increasedethicalbehaviorbymanagerswhich,inturn,mayhaveapositiveinfluenceonafirmsreputation.For
example,intheKPMGSurveyofCorporateResponsibilityReporting,themostcommonmotivationfor
disclosingsocialresponsibilitydataispotentialeconomicbenefits,whichincludestheindirectbenefitsfrom
increasedreputation(Verschoor,2005).
1SeeChaneyandPhilipich(2002)foradescriptionoftheEnronauditfailure.

Growetal.,(2005)summarizethetwoviewsonsocialresponsibility.First,theynotethatdetractorsto
socialresponsibilityclaimthatsocialresponsibilityisexpensiveandinconsistentwiththecorporategoalof
maximizingshareholderreturns.ThisviewpointissuccinctlysummarizedinaForbes.comcommentary(Atkins,
2006)asfollows...thenotionthatthecorporationshouldapplyitsassetsforsocialpurposes,ratherthanforthe
profitofitsowners,theshareholders,isirresponsible.Ontheotherhand,proponentsarguethatsocial
responsibility:BurnishesaCompanysReputation(Growetal.,2005).
Further,theywrite:
Inthewakeofcorporatescandals,corporatesocialresponsibilitybuildsgoodwillandcanpayoffwhen
scandalsorregulatoryscrutinyinevitablyarise.
Priorsocialresponsibilityresearchfindsmixedresultsregardingtheinfluenceofsocialresponsibility
onfirmvalue(e.g.,Wood,1992;Tepper,1993;Diltzetal.,1999;Statman,2000;Schueth,2003;Baueretal.
2005).However,theonlywaytotesttheclaimthatsocialresponsibilitypaysoffinacrisisistoconductan
eventstudyinasituationwherethemarketislikelytoreaccessfactorsrelatedtofirmreputation.Forexample,
environmentalresearchfindsthatpreviouslydisclosedenvironmentaldata,presumablyalreadyimpoundedin
stockprices,wasreassessedduringenvironmentalcrises(e.g.,BlacconiereandPatten,1994;PattenandNance,
1998).TheEnronauditfailureoffersauniqueopportunitytoperformaneventstudyexaminingtheinfluenceof
socialresponsibilityonfirmvalue.ThenegativereturnstoAAclientsfollowingtheEnronauditfailureimplya
presumptioninthemarketthatthefinancialstatementsofAAclientsweremoresusceptibletoaccounting
manipulations.ThecrosssectionalvariationinreturnstoAAclientsfollowingtheEnronauditfailuresuggests
thatinvestorsevaluatedfirmspecificfactorsrelatedtothecredibilityoffinancialstatementdata.Itislikely
thatoneofthemoreimportantfactorswasthereputationofthefirm.Therefore,partoftheobservedprice
reactiontotheEnronauditfailureislikelyrelatedtothereassessmentoffirmreputationsignals.
Ifsocialresponsibilitysignalsethicalbehavior,asproponentsofsocialresponsibilityclaim,investors
couldperceivethefinancialstatementsofhighsocialresponsibilityAAclientsaslesssusceptibletoaccounting
manipulation.Ontheotherhand,criticsofsocialresponsibilitywouldarguethatinvestorsdonottakesocial
responsibilityintoaccountwhenevaluatingfactorsrelatedtofinancialstatementcredibility.Itisthegoalofour
studytoshedlightonthesetwoopposingviewsregardingtheinfluenceofsocialresponsibilityonfirm
reputationduringaperiodofcrisis.
Weidentified147AAclientswithsocialresponsibilitydata.WematchedeachAAfirmwithanon
AAfirmthatalsohassocialresponsibilitydata.WereplicateChaneyandPhilipichs(2002)resultsregarding
thenegativereturnstoAAclientsfollowingtheEnronauditfailure.Weextendtheirworkbyexaminingthe
influenceofthreemeasuresofsocialresponsibilityonAAclientreturns.Inourprimaryanalyses,wefindno
evidencethatsocialresponsibilitymitigatedthenegativemarketreturnstoAAclientsfollowingtheEnronaudit
failure.Toexaminethesensitivityofourresults,weexaminemultiplemarketreturnmeasuresandmultiple
socialresponsibilitymeasures,andwecontinuetofindnoevidencethatsocialresponsibilitymitigatedthe
negativereturnstoAAclients.Ourresultssuggestthatsocialresponsibilitydidnotburnishfirmsreputationin
atimeofcrises,asproponentsofsocialresponsibilityclaim(Growetal.,2005).Ourresultsarealsoinconsistent
withpriorresearchfindingapositiveassociationbetweensocialresponsibilityandmarketvalue(Litvak,1992;
LuckandPilotte,1993;Diltzetal.,1999;Schueth,2003).Instead,ourresultsaremoreconsistentwiththe
criticsargumentthatexpendituresonsocialresponsibilityarenotconsistentwithmaximizingshareholdervalue
(Vance1975;Aupperleetal.1985;Atkins,2006),andwithpriorresearchfindingnoassociationbetweensocial
responsibilityandmarketvalue(e.g.,Hamiltonetal.1993;Diltz1995a,b;Guerard1996;Kurtzand
diBartolomeo1996;ReyesandGrieb1998;Statman2000andBaueretal.2005).
Therestofthispaperisorganizedasfollows.Section2reviewstheextantliteratureonauditor
reputationandsocialresponsibilityandpresentsthemotivationandresearchquestion.Section3describesthe
dataandmethodology.Section4presentstheprimaryresultsofthepaper.Section5describesseveralsensitivity
analyses.Finally,section6concludesthepaper.

LITERATUREREVIEW,MOTIVATIONANDRESEARCHQUESTIONS
AuditorReputation
Researchershaveexaminedtherelationshipbetweenauditorreputation,auditfeepremiums,and
financialperformanceindifferentcontexts.Bigauditingfirmschargeapremiumfortheirname(Craswelletal.,
1995;BandyopadhyayandKao,2001)andforindustryexpertise(Craswelletal.,1995).Implicitintheseresults
isthenotionthateconomicagentsarewillingtobearsomeincreaseincostsforwhatareperceivedtobehigher
qualityaudits(ChaneyandPhilipich2002).Fromaninvestorsperspective,bigauditsfirmsprovideadditional
assurancesthatthefinancialstatementsofthecompanyarefairlystatede.g.,Dye1993;MenonandWilliams
1994;Willenborg1999.
ChaneyandPhilipich(2002)directlylinkauditorreputationtomarketvalue.Theyexaminetheeffect
ofnegativeauditorreputationonthestockpricesofcompaniesassociatedwithAAduringkeydatesshortly
aftertheEnronauditfailure.ChaneyandPhilipich(2002)findthatAAclients(otherthanEnron)suffered
statisticallynegativeabnormalreturnsonthethreedaysafterAAadmittedtheyhadshreddeddocumentsrelated
totheEnronaudit,andonthethreedaysafterthereleaseofthePowersReport.Theyalsofindthatclientsof
AAsHoustonofficesufferedamoreseveredeclineinmarketvaluefollowingtheEnronauditfailurethandid
otherAAclients.Weextendtheirstudybyexaminingtheinfluenceofsocialresponsibilityonreturnsfollowing
theEnronauditfailure.
SociallyResponsibleInvesting
SRInowcapturesmorethanoneoutofeveryeightinvestmentdollarsintheU.S.(Kroll2001).While
thetermsociallyresponsibleinvestingissubjecttobroadinterpretationbycompanies,investorsandmutual
fundmanagers,thetermisgenerallyusedtodescribedogoodcompaniesthatupholdhighenvironmental,
socialand/orethicalstandards(Statman2000,OBrien2002;Baue2002).TheSocialInvestmentForum(2005)
reportedthatsociallyscreenedmutualfundsgrewfrom$12billionintotalnetfundassetstoover$179billion
from1995to2005.In2005,sociallyresponsibleinvestingaccountedfornearlyoneoutofeveryteninvestment
dollars(9.4%)underprofessionalmanagement(SocialInvestmentForum
2006).
Empiricalstudiesevaluatingtherelationshipbetweensocialresponsibilityandfinancialperformance
havereportedmixedresults.Someauthors(Vance1975;Aupperleetal.1985)arguethatsocialresponsibilityis
costly,andputscompaniesataneconomicdisadvantagecomparedtootherlesssociallyresponsiblefirms.
Consistentwiththeassertion,Wood(1992)andTepper(1993)findevidencethatsocialresponsibilityis
associatedwithbelowmarketreturns.Anothergroupofpapersfindsnoassociationbetweeninvestmentsin
sociallyresponsibleactivitiesandmarketvalue(e.g.,Hamiltonetal.1993;Diltz1995a,b;Guerard1996;Kurtz
anddiBartolomeo1996;ReyesandGrieb1998;Statman2000andBaueretal.2005).
Incontrasttothestudiescitedabove,severalpapersfindthatsocialresponsibilityisassociatedwith
returnsthatareabovemarketaveragesfortheperiodsstudied(Litvak,1992;LuckandPilotte,1993;Diltzetal.,
1999;Schueth,2003).Statman(2000)arguesthatdespitenostatisticallybetterreturns,investorsfeelattracted
toSRIduetothevalueexpressiveattributesprovidedbysociallyresponsiblecompanies.
SocialResponsibilityandFirmReputation
Socialresponsibilityisgenerallyassumedtoberelatedtoincreasedethicalbehavior(e.g.,seethe
definitionofsocialresponsibilityinWattsandHolme,1999).Thereisacommonperceptionthatsocial
responsibilityispositivelyassociatedwithfirmreputation(Growet.al.,2005;Verschoor,2005).AKPMG
surveyfindsthemostcommonreasonfordisclosingsocialresponsibilitywaseconomicconsiderations
(Verschoor,2005).Amongtheeconomicconsiderationswasthebeliefthatsocialresponsibilitywillprovide
indirecteconomicbenefitsbecauseofpositivereputationeffects.Growet.al.(2005)conciselysummarizesthe
argumentsonbothsidesofthesocialresponsibilitydebate.Socialresponsibilitydetractorsclaimthatsocial
responsibilityisexpensive,andthattheroleofbusinessistoincreaseshareholdervalueratherthantospend
shareholdermoneyoninvestmentsperceivedtohavesomesocialbenefit.Conversely,proponentsclaimthat
socialresponsibilitycanimprovethereputationofthefirm,whichwillbebeneficialintheeventofacrisis
[emphasisadded].
EventStudiesAnalyzingEnvironmentalResponsibility
Locketetal.(2006)identifythefourdominantthemesincorporatesocialresponsibilitymanagement
researchassocialresponsibility,environmentalresponsibility,businessethicsandstakeholderapproaches.
Lockettsclassificationisconsistentwiththosereferencedinotherresearch(e.g.,MattenandMoon,2004).
Socialresponsibilityisthebroadestofresearchareas,andencompassesresearchthatexaminestherelationship
betweenbusinessandsocietyinthecontextofcorporatecitizenship.
Weconstructaneventstudyexaminingtheinfluenceofcorporatesocialresponsibilityonfirmvalue
duringtheArthurAnderson/Enroncrisis.Priorenvironmentalresearchusesasimilarapproach.Forexample,
BlacconiereandPatten(1994,357)findevidencethatprioryearfinancialstatementenvironmentaldisclosures
mitigatedthenegativeintraindustrymarketreturnsthatoccurredfollowingUnionCarbideschemicalleakin
Bhopal,India.Theyconcludethatfirmswithmoreextensiveenvironmental(includingfinancial)disclosures
wereperceivedtobemoreenvironmentallyresponsible.PattenandNance(1998)findsimilarevidencerelating
totheExxonValdezoilspill(409).Insummary,environmentaldisclosureliteratureprovidessomeevidence
thatduringatimeofcrisis,firmsthatareperceivedtobeenvironmentallyresponsiblesufferedlessnegative
marketreturns.
MotivationandDevelopmentoftheResearchQuestion
Proponentsofsocialresponsibilityarguethatinatimeofcrisis,socialresponsibilitywillhavea
positiveinfluenceofthefirmsreputation(Growet.al.,2005).Alternatively,detractorsarguethatsocial
responsibilityisexpensiveandapooruseofshareholdermoney(Atkins,2006;Growet.al.,2005).Asnoted
earlier,thestrongesttestoftherelationshipbetweensocialresponsibilityandfirmvalueisaneventstudy
examiningasituationwherethemarketislikelytoreaccessfactorsrelatedtofirmreputation.TheEnronaudit
failureprovidesanidealsettingforexaminingtheinfluenceofsocialresponsibilityonfirmreputationduringa
periodofintensescrutiny.
ThenegativereturnsdocumentedbyChaneyandPhilipich(2002)followingAAsadmissionof
documentshreddingandthereleaseofthePowersReportsuggestthatthemarketquestionedAA's
independence,andthusquestionedthecredibilityofAAsclientsfinancialstatements.Inthisenvironment,
signalsregardingfirmreputationlikelyreceivedadditionalweightinvaluationdecisions.Ifsocialresponsibility
sendsapositivesignalregardingreputationorethics,asproponentscontend(Growet.al.,2005),thenthe
negativereturnsfoundbyChaneyandPhilipichwouldbemitigatedforfirmslabeledsociallyresponsible.
However,ifsocialresponsibilitydoesnotsendasignalregardingreputation,ascriticssuggest,therewouldbe
noassociationbetweensocialresponsibilityandmarketreturnsduringtheAAcrisis.Wethereforeposethe
followingresearchquestion:
ResearchQuestion:DoessocialresponsibilityshieldAAclients(otherthanEnron),fromthenegativemarket
reactiontoboththenewsthatAAshreddeddocumentsrelatedtotheEnronaudit,andtothereleaseofthe
PowersReport?
METHODOLOGY
DataSources
ThesocialresponsibilitydatausedinthisstudywereobtainedfromtheKinder,Lynderberg,Domini
ResearchandAnalytics,Inc.(KLD)database.FinancialdatawerecollectedfromCOMPUSTATandstock
pricedatawerecollectedfromtheCenterforResearchinSecurityPrices(CRSP).Finally,auditfeedatawere
collectedfromAuditAnalytics.
SocialResponsibilityMeasures
KLDratesacompanyssocialstrengthsandconcernsbasedonsevenqualitativescreens(strengthsand
concerns)andsixexclusionaryscreens(onlyconcerns).Thesevenqualitativescreensrelateto:Community,
CorporateGovernance,Diversity,EmployeeRelations,Environment,HumanRights,andProduct.Foreach
qualitativescreen,apredeterminedsetofcriteriaisusedtoidentifystrengthsandweaknesses.
Forexample,inthecommunitycategory,companiesreceiveastrengthratingforsupportinghousing
andeducation,volunteerprograms,innovativegiving,andforcharitablegivingover1.5percentperyear.
Negativepointswouldbepostedfortaxdisputes,lendingcontroversiesand/orbeingassociatedwithnegative
economicimpactsinthecommunity.Corporategovernancestrengthsincludetransparencyinpolitical
contributionsandeffectivesocialreporting,whileconcernsarerecordedforexcessiveCEOpayandaccounting
controversies.KLDscoresdiversitybasedonfemaleandminorityrepresentationontheboardofdirectors,the
presenceofafemaleorminorityCEO,employmentofthedisabled,gayandlesbianpolicies,promotionof
womenandminorities,womenandminoritycontracting,work/lifebenefitsandotherstrengths.Diversity
concernsaremarkedbynonrepresentationofotherwiseunderrepresentedgroupsineachofthestrength
categories,andbycontroversiesinvolvingdiversity.Employeerelationsrecordshealthandsafetyissues,
retirementbenefits,unionrelations,cashprofitsharingandemployeeinvolvementaspossiblestrengths,while
concernsarerecordedwherenegativeunionrelations,healthandsafetyorretirementbenefitsissues,and/or
workforcereductionshaveoccurredorarepending.
Intheenvironmentcategory,pollutionprevention,cleanenergyuse,majoruseofrecycledmaterials,
andcreation/saleofbeneficialproductsarestrengths.Environmentalconcernsarerecordedforhazardouswaste
sites,substantialpenaltiesforenvironmentalviolationsorforcontributingsignificantlytoclimatechange.
HumanRightsstrengthsincludelaborrightsandrelationshipswithindigenouspeoples,whilepoorlaborrights
orno/poorrelationshipswithindigenouspeoplesarescoredasconcerns.Productrelatedstrengthsinclude
productsthanbenefiteconomicallydisadvantaged,highproductquality,andresearch,developmentandproduct
innovation.Productspecificconcernsarelistedasantitrust,marketingcontractingproblemsandproductsafety
issues.
Theoverallscoreforeachqualitativescreenisequaltothesumofstrengthslessthesumofweakness.
Forexample,ifstrengthstotaledfourandweaknessestotaledone,thenetscoreforthatqualitativescreenwould
bethree.
Inadditiontothesevenqualitativescreens,KLDalsosuppliesalistofsixexclusionaryscreens.
Exclusionaryscreensarescoredonlyfornegatives.Alcohol,Gambling,Firearms,Military,NuclearPowerand
Tobacco,aretheexclusionaryscreens.Forexample,theFirearmsscreeniscodedoneformanufacturersand
retailersoffirearms,orforacompanythatownsmorethan20%ofanothercompanywithfirearmsinvolvement,
orforacompanymorethan50%ownedbyacompanywithfirearmsinvolvementandzerootherwise.
Consideringthepossibilitythatasingle,overallmeasureofsocialresponsibilitymay,inlieuofamore
complexmeasure,capturefirmlevelsocialresponsibility,weconstructameasureofaggregatesocial
responsibilitybytotalingeachofthesubcategorystrengthsandeachofthesubcategoryconcerns.We
calculateSRNETbysubtractingthesumoftheconcernsfromthesumofthestrengths.Inourprimaryanalyses,
wecontrolforthesixexclusionaryscreensusingindicatorvariablesratherthanincludingthescreensin
SRNET.SRNETcanconceivablytakeonvaluesfrom38to37,with37representinghighsocialresponsibility,
and38representinglowsocialresponsibility.RefertoTable1,PanelA,formoredetailsontheindividual
categoriesusedfortheconstructionofSRNET.
Wealsoconductanalysesusingtwoaggregatemetricsforsocialresponsibility.Thefirstaggregate
socialresponsibilitymeasureiscodedoneifthevalueforSRNETispositive,andzerootherwise(SRHIGH).In
addition,wegenerateameasureofsocialresponsibilitybycodingthesocialresponsibilityvariableasoneifthe
firmisamemberoftheDomini400SocialIndex,andzerootherwise(DOMINI).Sinceafirmisincludedin
KLDsDomini400SocialIndexonlyifthefirmisdeemedsociallyresponsible,Domini400SocialIndex
membershipprovidesapositiveindicatorofsocialresponsibility.
Sample
WebeginwithallAAfirmsincludedintheKLDdata.TheKLDdatabasecontainsdataon1,058firms.
Ofthe1,058firms,188firmsareAAclients.WenextmatcheachAAfirmtoanonAAfirmfromtheKLD
databasebasedonindustry,sizeandBig5auditor.Intheprocessofmatching,25firmsarelostbecausewe
wereunabletofindareasonablematchfor2digitSICorsize.Ofthe163firmsmatched,16matcheswerelost
becausedatafromCRSP,Compustat,orAuditAnalyticswasnotavailableforoneormoredataitem.Thefinal
sampleis294firms(147AAclientsand147matchingfirms)thatareratedbyKLDinbothoftheyearsusedin
ourstudyperiod(20012002).5Ofthe147AAclientsinoursample,13areclientsoftheHoustonAAoffice.
MeasurementofMarketReaction
ThefirststepinexaminingthemarketreactiontotheAAauditfailureistocalculateabnormalreturns
(AR).WeusemarketadjustedreturnstocalculateAR.Inthismodel,theCRSPvalueweightedmarketindex
returnissubtractedfromafirmsdailyreturntoobtainthemarketadjustedAR.6ThedailyARsareaggregated
(summed)toobtaincumulativeabnormalreturn(CAR)overagivennumberofdays.CARforagivenfirmcan
bedefinedas
follows:
(rumus1)
wherealphaisthefirstdayintheeventwindow,bisthelastdayintheeventwindow.Foreachoftheevent
crisisdatesidentifiedpreviously(January10andFebruary2,2002).WecalculateCARforthetypicalthreeday
window(1,+1),aswellasthetwomainwindowsexaminedbyChaneyandPhilipich(0,+1)and(0,+2).
FindingasignificantlynegativeCARduringeachoftheeventwindowsdescribedabove,wouldcorroborate
ChaneyandPhilipichs(2002)findings.
WetestourmainresearchquestionusingamodifiedversionofChaneyandPhilipichs(2002)
regressionmodel.Theregressionequationisacrosssectionalanalysismodelthatallowsustoexaminethe
relationbetweenfirmspecificmarketreactionsandfirmspecificvariables.Themodifiedmodelisasfollows:
(rumushalaman13)
AsignificantlypositivecoefficientontheSRinteractionvariableswouldsuggestthatsocial
responsibilitymitigatedthenegativereturnsfollowingtheEnronauditfailure.ChaneyandPhilipich(2002)
arguethatlargerfirmsareoftenthoughttohavemoreincentivetomanageearnings,andmoreopportunitiesto
manageearnings.Theyalsonotethatfinancialstatementsinlargefirmsmaybemorecomplicatedandless
transparent.Hence,wepredictanegativecoefficientforSP500.Companieswithhighleverage(LEV)mightbe
morelikelytouseoffbalancesheetfinancing(ChaneyandPhilipich2002).Therefore,wepredictthatthe
coefficientforLEVwillbenegativeandsignificant.
Enronssalesincreasedbyapproximately150%between1999and2000(ChaneyandPhilipich2002).
Tocontrolforaggressiverevenuerecognition,ChaneyandPhilipich(2002)includedthegrowthinrevenue
(GROWTH)between1999and2000.Wepredictthecoefficientofthisvariablewillbenegativeandsignificant.
SimilartoChaneyandPhilipich(2002),weincludefourindustryindicatorvariablestocontrolforindustriesfor
whichAApossessedindustryspecificexpertise(commercialservicesandsupplies,oilandgas,machineryand
electricalutilities).Thesevariablesproxyforpotentialauditorswitching.Finally,weincludeindicatorvariables
foreachofthesixindustriesincludedintheKLDexclusionaryscreens(Alcohol,Gambling,Firearms,Military,
NuclearPowerandTobacco).
RESULTS
SummaryStatistics
InTable1,wepresentgeneraldescriptivestatisticsforoursample.InTable2,weprovidedescriptive
statisticsforthesocialresponsibilityvariablesingreaterdetail.
(InsertTables1,and2abouthere)
InTable1,PanelB,themeans(std.deviation)fortheindividualKLDqualitativescreensare
presented.Themeanforeachindividualscreenisreasonablyclosetozero,indicatingthatthestrengthsand
weaknessesroughlybalanceeachother.Inmeancomparisonttests,wefindnosignificantdifferencesinthe
sevenqualitativescreensbetweenAAfirmsandnonAAfirms.
InTable1,PanelC,wefindthattheAAfirmsandnonAAfirmsaresimilarwithrespecttothe
independentvariables.Samplefirmsaregenerallylarge(roughly45%areS&P500)withhighgrowthrates
(mean=45%forAAfirmsand39%fornonAAfirms).Inmeancomparisonttest,wefindnostatistically
significantdifferencesbetweentheAAfirmsandnonAAfirms.
InPanelAofTable2,wefindthatthemeanvalueforSRNETisslightlysmallerforAAfirms(.286)
thanfornonAAfirms(.0476).Forbothgroupsoffirms,thelevelofsocialresponsibilitystrengthsisroughly
equaltothelevelofsocialresponsibilityconcerns.Roughly36%(35%)oftheAA(nonAA)clientsare
membersoftheDomini400SocialIndex.Wefindnostatisticallysignificantdifferencesinthethreesocial
responsibilitymeasuresbetweentheAAfirmsandthenonAAfirms.
InPanelBofTable2,wecompareAAfirmstononAAfirmsafterexcludingtheAAHoustonOffice
clientsalongwiththeircorrespondingmatch.TheseanalysesrevealsimilarpatternstothosereportedinPanel
A.Again,wefindnosignificantdifferencesbetweenAAfirmsandnonAAfirms.
UnivariateAnalyses
SimilartoChaneyandPhilipich(2002),weexaminetwoeventdates.Onthefirstdate,January10,
2002,AAannouncedthatitsauditorshadshreddeddocumentsrelatedtotheEnronaudit.Ontheseconddate,
February2,2002,thePowersReportwasreleased.7Inourmainanalyses,weexamineatypicalthreeday
windowCAR(1,+1),aswellasthetwoandthreedaywindowsexaminedbyChaneyandPhilipich[i.e.,CAR
(0,+1)andCAR(0,+2)].TheCARanalysisisshowninTable3.
(InsertTable3abouthere)
Table3includesfivecomparisons:1)allAAfirmsversusallnonAAcontrolfirms,2)AAHouston
firmsversusAANonHoustonfirms,3)AAfirms(excludingHouston)versusNonAAcontrolfirms(excluding
Houston),4)AAhighsocialresponsibilityfirmsversusallotherAAfirms,and5)AAnonDominifirmsversus
AADominifirms.
InPanelA,forboththefullsampleandthenonHoustonfirms,wefindnegativeandsignificantCARs
forAAfirmsintheJanuary(0,+1)andthe(0,+2)windowsandforthecontrolfirmsintheJanuary(0,+2)
window.WefindthatthenegativereturnsaresignificantlymorenegativeforAAfirmsrelativetononAA
firmsinthe(0,+1)windowforboththefullsample(p=.039,twotailed)andforthenonHoustonsample(p=.
058,twotailed).ConsistentwithChaneyandPhilipich(2002)wefindthatthenegativereturnsaresignificantly
moreseverefortheHoustonAAfirmsrelativetononHoustonAAfirmsinthe(0,+1)andthe(0,+2)windows
(p<.05),andarelargeinmagnitude(3.72%,4.84%,respectively).Surprisingly,wefindnoevidenceof
negativereturnsintheFebruarywindows.
InPanelBweexaminetheinfluenceofsocialresponsibilitymeasuresonCARsusingallnonHouston
AAfirms.WeexcludetheHoustonAAfirms,andtheirmatches,toremovethepossibilitythatthelarge
negativereturnstotheHoustonAAfirmswillinfluenceresults.WefindnoevidenceofnegativereturnstoAA
firmswhenSRHIGHiscoded1andwhenthefirmisamemberoftheDomini400SocialIndex,whichis
consistentwithsocialresponsibilitymitigatingthenegativereturns.However,wefindnosignificantdifference
inreturnsbetweenSRHIGHAAfirmsandotherAAfirmsorbetweenDomini400SocialIndexAAfirmsand
otherAAfirms.
InTable4,wepresentPearsoncorrelationcoefficientsforvariablesincludedintheregressionsafter
excludingtheHoustonfirms.IntheFebruary(0,+1)and(0,+2)windowswefindapositiverelationship
betweenDomini400SocialIndexmembershipandabnormalreturns.Wefindapositiverelationshipbetween
ourcontinuossocialresponsibilitymeasure(SRNET)andtheJanuary(0,+1)window.However,wefindno
significantrelationshipsbetweenabnormalreturnsandorourhighsocialresponsibilitymeasure(SRHIGH).
Allthreesocialresponsibilitymeasuresaresignificantly,negativelycorrelatedwithGROWTH,and
significantly,positivelycorrelatedwithbothAUDITFEEandNONAUDITFEE.
(InsertTable4abouthere)
MultivariateAnalyses
WereportresultsforeachofthethreemeasuresofsocialresponsibilityinTables5,6and7.Ineach
table,weestimatemodel(2)usingthe(1,+1),(0,+1)and(0,+2)windowsfortheJanuaryevent.Weestimate
ourmodelsexcludingHoustonofficeAAclientsandtheircorrespondingmatch.Weonlyreportresultsforthe
JanuarywindowsbecausewefindnoevidenceofnegativereturnstoAAfirmsintheFebruarywindows.9The
modelsareestimatedusingordinaryleastsquareswithWhitesheteroscedasticityconsistentstandarderrors.
(InsertTables5,6and7abouthere)
InTable5wereportresultswhenusingSRNETasoursocialresponsibilitymeasure.Wefinda
negativeandsignificantcoefficientonAAintheJanuary(0,+1).WedonotfindanyevidencethatSRNET
mitigatedthenegativereturnstoAAfirms.InTable6weusemembershipintheDomini400SocialIndexas
oursocialresponsibilitymeasure.Again,wefindanegativeandsignificantcoefficientforAAintheJanuary(0,
+1)window.WedonotfindanyevidencethatDomini400SocialIndexmembershipmitigatedthenegative
returnstoAAfirms.Finally,inTable7weusethecategoricalvariableSRHIGH,whichiscodedoneifSRNET
ispositive,asourmeasureofsocialresponsibility.WefindnoevidencethatSRNETmitigatedthenegative
returnstoAAfirms.
Sofar,ourresultssuggestthatsocialresponsibilitydidnotmitigatethenegativereturnstoAAfirms
followingtheEnronauditfailure.Theresultsareinconsistentwithclaimsbyproponentsofsocialresponsibility
thatsocialresponsibilitycanburnishacompanysreputationinatimeofcrisis.Ourresultsaremoreconsistent
withthecriticsclaimthatexpendituresonsocialresponsibilityactivitiesarenotconsistentwithmaximizing
shareholderreturns.Inthenextsection,weperformseveralsensitivityteststoexaminetherobustnessofthe
reportedtests.

SensitivityAnalyses
AlternateWaystoEstimateCAR
WehaveusedmarketadjustedCARs(usingavalueweightedindex)tomeasurethemarketreactionto
theEnronauditfailure.WerecalculateCARsusinganequallyweightedindexandweobtainqualitatively
similarresults.Additionally,wereestimatethemodelsafterreplacingmarketadjustedCARswithCARs
calculatedusingthemarketmodel.ResultsarequalitativelysimilartothosereportedinTables5,6and7.10
AlternateCARWindows
InadditiontotheJanuaryandFebruarywindows,weexamineotherpotentialeventwindowsin
NovemberandDecember.OnNovember8,2001,Enronannouncedtheearningsrestatementthatultimatelyled
tothedeclineofthecompany.OnDecember12,2001,AAsCEOadmittedthatAAmadeanerrorintheEnron
audit.WefindanegativemarketreactiontoAAclientsintheDecemberwindowonly.However,wefindno
evidenceofamitigatingeffectfromsocialresponsibilityintheDecemberwindow.
Wealsoexaminedtwolongerwindows,atwomonthwindowfromJanuary1,2002toFebruary28,
2002,andafourmonthwindowformDecember1,2001toFebruary28,2002.Wefindnoevidenceofnegative
returnstoAAclients,andnoevidencethatsocialresponsibilitymitigatednegativereturns.
AlternativeConstructionofSocialResponsibilityVariables
Inourprimaryanalyses,wedonotincludethesixexclusionaryscreensinourcalculationofSRNET
andSRHIGH.Instead,weincludeindicatorvariablesfortheindustriesidentifiedintheexclusionaryscreens.If
weincludetheexclusionaryscreensinthecalculationofSRNETandSRHIGH,resultsarequalitativelysimilar
tothosereportedinTables5,6and7.
Ineachmodel,SRNETisthenetdifferenceofstrengthsandconcerns.Wereestimatethemodels
usingthesumofthestrengthsorthesumoftheconcernsinplaceofSRNET.Thisalternatedefinitionofsocial
responsibilitydoesnotaffecttheresults.Wealsoexaminedtherelationshipbetweeneventwindowreturnsto
AAclientsandeachindividualscreen(bothqualitativeandexclusionary).Wefindnoevidencethatanyone
individualscreenisrelatedtoeventwindowreturnstoAAclients.
LinkingSocialResponsibilitytoEthicalBehavior
Thecontentionthatsocialresponsibilityprovidesapositivesignalregardingthereputationofthefirm
implicitlyassumesthatfirmsthataremoreethicalwillhavehigherlevelsofsocialresponsibility.Totheextent
thatthisistrue,firmsthathaveengagedinunethicalbehaviorwouldbemorelikelytohavelowerlevelsof
socialresponsibility.Toexaminethiscontention,wereviewedthesocialresponsibilitymeasuresfortwofirms
thatdemonstratedquestionableethics.Specifically,weexamineEnronandWasteManagement.11Enrons
SRNETscorewas0,SRHIGHwas0,andDOMINIwas0.WasteManagementsSRNETscorewas7,
SRHIGHwas0,andDOMINIwas0.Withrespecttothedetailedsocialresponsibilitymeasure(SRNET),
WasteManagementcertainlystandsoutashavingapoorsocialresponsibilityscore,whileEnronwouldbe
characterizedasaverage.Usingthemoreaggregatedindicatorvariables,bothfirmsfailtomeetthedefinitionof
ahighsocialresponsibilityfirm.Theaggregatedsocialresponsibilitymeasuresareconsistentwithexpectations.
However,giventhatEnronsSRNETscoreisclosetothemeanforSRNET,thedetailedsocialresponsibility
measureisclearlynotaperfectexantepredictorofmanagerialcredibilityorethics.
CONCLUSION
ChaneyandPhilipich(2002)documentthatAAclientssufferednegativemarketreturnsintheperiod
followingtheEnronauditfailure.Theyconcludethatthenegativereturnswererelatedtoinvestorslossof
confidenceinAA.WeextendChaneyandPhilipich(2002)byexamininghowsocialresponsibilityinfluenced
marketreturnstoAAsclientsfollowingtheEnronauditcollapse.Proponentsofsocialresponsibilityclaimthat
socialresponsibilitywillimprovethereputationofthefirm,whichwillbebeneficialintheeventofacrisis
(Growet.al.2005).TheEnronauditfailureoffersauniqueopportunitytoexaminehowsocialresponsibility
influencesperceptionsregardingthecredibilityofthefirminaperiodofcrisis.FollowingtheEnronaudit
failure,investorsreassessedthecredibilityofAAclients,whichessentiallyresultsinanaturalexperimentwith
respecttofactorsassociatedwithfirmreputation.Ifsocialresponsibilityhasapositiveaffectonreputation,
socialresponsibilitycouldmitigatethenegativereturnstoAAclients.
IntheperiodfollowingtheannouncementthatAAshreddeddocumentsrelatedtotheEnronaudit,we
findevidenceofnegativereturnstoAAsclients.UsingdatafromKLD,weexaminethepossibilitythatsocial
responsibilitymitigatedthenegativetoAAclients.Specifically,weexaminethenetsocialresponsibilityscore,
anindicatorvariablecodedoneifthenetsocialresponsibilityscoreispositive,andanindicatorvariablecoded
oneifthefirmisamemberoftheDomini400SocialIndex.Wefindnoevidencethatanyofthethreemeasures
mitigatedthenegativereturnstoAAclientsfollowingtheEnronauditfailure.
Withrespecttothepublicdebateonsocialresponsibility,ourstudydoesnotsupportthecontention
thatsocialresponsibilitycanbrandishthereputationofthefirminatimeofcrisis.GiventhenatureoftheEnron
auditfailure,thecrisisperiodmaybeatimewhenfactorsassociatedwithfirmreputationshouldhavetakenon
additionalimportance.Ourresultsaremoreconsistentwiththecriticsofsocialresponsibility,whoclaimthat
expendituresonsocialresponsibilityarenotconsistentwithmaximizingshareholderreturns,andwithprior
researchfindingnoassociationbetweensocialresponsibilityandfirmvalue.