In the Eyes of the Beholder: The Rationality of Status Anxiety-Based Decision-Making

Abstract

Corporate-level fraudulent activity has instilled a state of concern and heightened awareness in investors, the media and employees alike as perceived sensitivity to illegal behavior continues to increase. With corporate giants such as Enron, Tyco and Health South being prime examples of this fraudulent behavior, the ripple effects felt by suppliers, customers and investors has been tremendous. Given the extensive influence of these large organizations, one issue of concern is the status anxiety experienced by those firms formally connected to these violating companies. We examined the decision of supplying or buying firms to disassociate themselves with the investigated or indicted organizations prior to or after the issue of formal charges. We view this disassociation as the result of organizational status anxiety, with the intent of reducing or eliminating any negative image association with the organization under scrutiny. While this disassociation is indicative of anxiety internal to the associated organization, we further examined the perceived uncertainty of investors before, during, and after this decision. Are investors as concerned with the presence/absence of a relationship with a fraudulent firm as management? And do investors punish or reward a firm for cutting ties with a devious partner? We answer these questions by examining firms associated with Arthur Anderson during its quick collapse. Specifically, we use options data, along with data related to the severing of relations between various firms and Arthur Anderson. Findings suggest potential misalignment of managerial behavior and the value of that behavior as perceived by investors.

Keywords: Status Anxiety, Investor Fear, Market Volatility, Agency Theory, Implied Volatility, SEC, Fraud, Accounting Fraud, Financial Fraud, Corporate Deviance, Enron, Arthur Andersen, Audit Quality, Auditor Quality

JEL Classification: G10, G30, G34, K22, M41, M49