ABSTRACT: The literature provides mixed evidence on whether investors find audit reports modified for going concern reasons to be useful. Using a substantially larger sample than previous studies, we observe negative excess returns when the going concern audit report (GCAR) is disclosed. We find that the reaction is more negative if the GCAR cites a problem with obtaining financing, suggesting that the GCAR provides new information to investors. Also, the reaction is more adverse if the GCAR triggers a technical violation of a debt covenant that restricts the firm from getting a GCAR. The evidence suggests that institutional investors drive the reaction to the GCAR, since there is no detectable reaction at low levels of institutional ownership. The market reaction gets more negative as the level of institutional ownership increases, and there is a decline in institutional ownership after the GCAR is issued. We attribute these results to sophisticated investors’ awareness of the firm’s financing needs and the covenants carried by the firm’s debt.
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Research Article| November 01 2010
Investor Reaction to Going Concern Audit Reports
Online ISSN: 1558-7967
Print ISSN: 0001-4826
American Accounting Association
The Accounting Review (2010) 85 (6): 2075–2105.
Krishnagopal Menon, David D. Williams; Investor Reaction to Going Concern Audit Reports. The Accounting Review 1 November 2010; 85 (6): 2075–2105. https://doi.org/10.2308/accr.2010.85.6.2075
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