SSRN-In Denial? Stock Market Underreaction to Going-concern Audit Report Disclosures by Junhua Lu, Richard Taffler, Asad Kausar

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In Denial? Stock Market Underreaction to Going-concern Audit Report Disclosures

JUNHUA LU
Standard & Poor's
RICHARD TAFFLER
University of Edinburgh - Accounting and Finance
ASAD KAUSAR
Manchester Business School

Journal of Accounting and Economics, Vol. 38, Nos. 1-3, December 2004

Abstract:
We investigate the stock price reaction to UK going-concern audit report disclosures in the calendar year subsequent to publication. Over this period our firm population underperforms by between 24% and 31% depending on the benchmark adopted. This market underreaction to such an unambiguous bad news release is not a post-earnings announcement drift phenomenon; it is also robust to other potentially confounding explanations. However, whatever the reasons for such stock mispricing, we find costly arbitrage prevents rational investors forcing prices back into line with fundamental value. Our results have implications for the market's ability to impound bad news appropriately and the incompleteness of arbitrage in such small "loser" firm situations.

Keywords: Market anomalies, Investor biases, Behavioral finance, Limits to arbitrage

JEL Classifications: G14, M41, M47, M49

Accepted Paper Series

Contact Information for RICHARD TAFFLER (Contact Author) Email address for RICHARD TAFFLER University of Edinburgh - Accounting and Finance William Robertson Building Edinburgh EH8 9JY United Kingdom
Contact Information for ASAD KAUSAR Email address for ASAD KAUSAR Manchester Business School Booth Street West Manchester M15 6PB United Kingdom
Contact Information for JUNHUA LU Email address for JUNHUA LU Standard & Poor's London EC2M 7NJ United Kingdom +442071768453 (Phone)

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