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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 SeriesDate posted: October 21, 2004 ; Last revised: March 06, 2005Suggested CitationContact Information
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