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The Long-Term Performance and Failure Risk of Firms Cited in the US SEC's Accounting and Auditing Enforcement Releases

Authors

  • Fei Leng,

    1. The authors are from the University of Washington at Tacoma. They are grateful for the valuable comments received from an anonymous referee and Martin Walker (editor). They also thank the participants at the 2010 American Accounting Association Western Region Meeting, the brownbag research seminar and the 2010 Academic Conference on Social Responsibility at the University of Washington Tacoma for comments and suggestions. The authors appreciate the summer research support and the subscription to Moody's Corporate Default Risk Service Database from the Milgard School of Business, University of Washington at Tacoma.
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  • Ehsan H. Feroz,

    1. The authors are from the University of Washington at Tacoma. They are grateful for the valuable comments received from an anonymous referee and Martin Walker (editor). They also thank the participants at the 2010 American Accounting Association Western Region Meeting, the brownbag research seminar and the 2010 Academic Conference on Social Responsibility at the University of Washington Tacoma for comments and suggestions. The authors appreciate the summer research support and the subscription to Moody's Corporate Default Risk Service Database from the Milgard School of Business, University of Washington at Tacoma.
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  • Zhiyan Cao,

    1. The authors are from the University of Washington at Tacoma. They are grateful for the valuable comments received from an anonymous referee and Martin Walker (editor). They also thank the participants at the 2010 American Accounting Association Western Region Meeting, the brownbag research seminar and the 2010 Academic Conference on Social Responsibility at the University of Washington Tacoma for comments and suggestions. The authors appreciate the summer research support and the subscription to Moody's Corporate Default Risk Service Database from the Milgard School of Business, University of Washington at Tacoma.
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  • Sergio V. Davalos

    Corresponding author
    1. The authors are from the University of Washington at Tacoma. They are grateful for the valuable comments received from an anonymous referee and Martin Walker (editor). They also thank the participants at the 2010 American Accounting Association Western Region Meeting, the brownbag research seminar and the 2010 Academic Conference on Social Responsibility at the University of Washington Tacoma for comments and suggestions. The authors appreciate the summer research support and the subscription to Moody's Corporate Default Risk Service Database from the Milgard School of Business, University of Washington at Tacoma.
    Search for more papers by this author

Fei Leng, Milgard School of Business, University of Washington at Tacoma, 1900 Commerce Street, Tacoma, WA 98405–3100, USA. email: fleng@uw.edu

Abstract

Abstract:  We investigate 239 firms cited in the SEC's Accounting and Auditing Enforcement Releases (AAERs). We document significantly negative abnormal operating performance (measured using both cash-flow-based and earnings-based metrics) in the second and third years following AAERs. We also detect significantly negative abnormal stock returns in up to three years following AAERs. We further find that AAER firms are more likely to fail in the post-AAER period. Taken together, our findings suggest that the negative implications of an AAER citation resulting from egregious financial reporting violations can be long lasting and influence various facets of firm performance and survivability.

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