The stock market reaction to Ernst & Young's sale of its consulting unit to Cap Gemini

Abstract

Purpose

The purpose of this paper is to investigate how the stock prices of Ernst & Young's (E&Y's) audit clients reacted to the sale of the accounting firm's consulting unit to Cap Gemini. The study is motivated by the debate on how the provision of non‐audit services by auditors affects investor perceptions of auditor independence.

Design/methodology/approach

This paper uses the event study approach and examines market model prediction errors around relevant dates.

Findings

E&Y client firms' mean and median abnormal stock returns are significantly positive for two events, the approval of the sale by E&Y's partners, and the approval of the transaction by Cap Gemini stockholders.

Research limitations/implications

This study is limited to one major audit firm for reasons discussed in the paper.

Originality/value

This study offers evidence on investor perceptions of auditor independence without relying on an earnings management model as is common in the literature. This study's evidence suggests that investors view the separation of auditing and consulting favorably.

Citation

Liu, C. and Nabar, S. (2006), "The stock market reaction to Ernst & Young's sale of its consulting unit to Cap Gemini", Managerial Auditing Journal, Vol. 21 No. 9, pp. 948-956. https://doi.org/10.1108/02686900610705037