Going-Concern Initial Public Offerings
Posted: 16 Aug 1998
Date Written: June 1998
This study examines the role of going-concern (GC) audit opinions in initial public offerings of equity securities. Concentrating on the "small deal" (proceeds up to $10 million) segment of the IPO market, we find that GC opinions appear to be useful in evaluating IPO securities in at least two areas. Adding GC information to a delisting model using other publicly available information, we find that the explanatory power of the model is significantly increased. We also find that securities with GC opinions suffer less first-day underpricing than similar securities without GC opinions. Based on Rock's (1986) model, this implies that firms with GC opinions have less ex ante uncertainty (regarding the true value of their IPO shares) than non-GC firms. Thus the GC opinions seem to reduce ex ante uncertainty for investors.
JEL Classification: M49, G32, G12
Suggested Citation: Suggested Citation