Abstract

http://ssrn.com/abstract=1626447
 
 

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Investor Reaction to Going Concern Audit Reports


Krishnagopal Menon


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

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.

Keywords: Audit reports, going concern, debt covenants, institutional ownership

JEL Classification: M41, G14, G32

Accepted Paper Series


Not Available For Download

Date posted: June 18, 2010  

Suggested Citation

Menon, Krishnagopal and Williams, David D., Investor Reaction to Going Concern Audit Reports (June 17, 2010). The Accounting Review, November 2010; Fisher College of Business Working Paper No. 1626447. Available at SSRN: http://ssrn.com/abstract=1626447

Contact Information

Krishnagopal Menon
Boston University - Department of Accounting ( email )
595 Commonwealth Avenue
Boston, MA 02215
United States
617-353-2661 (Phone)
617-353-6667 (Fax)
David D. Williams (Contact Author)
Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )
2100 Neil Avenue
Columbus, OH 43210
United States
614-292-8566 (Phone)

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