Investor Reaction to Going Concern Audit Reports

The Accounting Review, November 2010

Fisher College of Business Working Paper No. 1626447

Posted: 18 Jun 2010  

Krishnagopal Menon

Boston University - Department of Accounting

David D. Williams

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Date Written: June 17, 2010

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

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: https://ssrn.com/abstract=1626447

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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