Investor Reaction to Going Concern Audit Reports
Boston University - Department of Accounting
David D. Williams
Ohio State University (OSU) - Department of Accounting & Management Information Systems
June 17, 2010
The Accounting Review, November 2010
Fisher College of Business Working Paper No. 1626447
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.
Keywords: Audit reports, going concern, debt covenants, institutional ownership
JEL Classification: M41, G14, G32
Date posted: June 18, 2010
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