How Do Auditors Behave During Periods of Market Euphoria? The Case of Internet IPOs

The study of periods of market euphoria, such as Holland’s seventeenth-century tulip mania, England’s eighteenth-century South Sea Company, America’s nineteenth-century railroads, or, most recently, the U.S. housing market, is a topic of long-standing interest to economists. Theorists specify conditions under which market participants and institutions cause ‘‘bubbles’’ to arise and persist and empiricists test participant-centric or institution-centric explanations (Hong, Scheinkman, and Xiong 2008; Schultz 2008; Greenwood and Nagel 2009). In this paper, we study a different participant other than one that stands to gain from price fluctuations. We are interested in how auditors behave during periods of market euphoria. Given their gatekeeper responsibility to act in the public’s interest, along with the seeming inevitability of bubbles (Rampell 2009), it is important to study how auditors behave during euphoric market conditions. To address this question, we examine auditor going-concern (GC) opinions around the time of the wave of stressed Internet firms filing to go public on NASDAQ, the capital markets entry point for the companies that went on to constitute ‘‘dotcom mania’’. To some, the answer to this question is straightforward: auditors became acquiescent.