The Effect of Going-Concern Diagnosticity on Market Prices

46 Pages Posted: 2 Jan 2013 Last revised: 3 May 2017

See all articles by Jennifer Winchel

Jennifer Winchel

University of Virginia - McIntire School of Commerce

Scott D. Vandervelde

University of South Carolina - Darla Moore School of Business

Brad Tuttle

University of South Carolina - Department of Accounting

Date Written: March 22, 2017

Abstract

The market effects of high profile corporate failures have led to increased interest by investors and regulators on the quality, or diagnosticity, of auditors’ going-concern opinions. Extant research suggests that going-concern opinions are moderately diagnostic at best, as only fifty to sixty percent of financially distressed firms actually receive going-concern opinions prior to bankruptcy. What remains unexplored is whether uncertainty created by moderate diagnosticity systematically influences investor behavior. Using an experiment, we investigate the effects of going-concern diagnosticity on stock price judgments. Results suggest that in a market with moderately diagnostic going-concern opinions, investors penalize the prices of firms receiving clean opinions and overvalue firms receiving going-concern opinions as compared to a market with highly diagnostic opinions. Interestingly, we also show that pricing behavior in a moderately diagnostic market is no different than a market without any going-concern signals. These findings have implications for regulators who are interested in understanding how the quality of going-concern opinions influences market price behavior and, in turn, investor wealth

Keywords: going-concern opinions, diagnosticity, investor confidence, bankruptcy

Suggested Citation

Winchel, Jennifer and Vandervelde, Scott D. and Tuttle, Brad, The Effect of Going-Concern Diagnosticity on Market Prices (March 22, 2017). Available at SSRN: https://ssrn.com/abstract=2195652 or http://dx.doi.org/10.2139/ssrn.2195652

Jennifer Winchel (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

Scott D. Vandervelde

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States

Brad Tuttle

University of South Carolina - Department of Accounting ( email )

The Francis M. Hipp Building
1705 College Street
Columbia, SC 29208
United States
803-777-6639 (Phone)
803-777-6876 (Fax)

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