Market Information and Predictive Accuracy of the Going Concern Opinion
Kannan Raghunandan
Florida International University (FIU) - School of Accounting
K.R. Subramanyam
University of Southern California - Leventhal School of Accounting
August 2003
Abstract:
We find a model that uses both financial statement and market information is an unambiguously superior predictor of bankruptcy than the going concern (audit) opinion. However, the audit opinion has incremental predictive ability for bankruptcy beyond both financial statement and market-based variables, suggesting that financial statement and market information in combination is not a sufficient statistic for the information and expertise of the auditor. A comparison of the audit opinion and bankruptcy prediction models indicates the auditors' inferior performance vis-a-vis the model likely arises because auditors do not correctly use public (financial and market) information. In particular, auditors appear to underweight stock price information but overweight conventional financial statement ratios, cash flow from operations and firm size (measured by total assets) when issuing going concern opinions.
Number of Pages in PDF File: 52
JEL Classification: G33, M49
working papers series
Suggested Citation
Raghunandan, Kannan and Subramanyam, K.R., Market Information and Predictive Accuracy of the Going Concern Opinion (August 2003). Available at SSRN: http://ssrn.com/abstract=427682 or http://dx.doi.org/10.2139/ssrn.427682
