Going-Concern Opinions, Corporate Control, Executive Compensation and Management Turnover

Abstract

We investigate economic consequences of going-concern opinions in terms of corporate control, executive compensation and management turnover. We argue that announcement of going-concern opinions either decreases firm value or signals negatively to investors. Therefore, upon the announcement of these opinions, companies are motivated to go through organizational changes to strengthen monitoring and restore investors’ confidence. These organizational changes include modifications in corporate ownership, executive compensation and management turnover. Based on a sample period of 1995 – 2012 and using a difference-in-difference approach, we find that the existence of going-concern opinions results in decreases in ownerships of blockholders and institutional investors. In addition, the presence of these opinions decreases CEO compensation and increases subsequent turnovers of top managers and auditors. Our findings point out other adverse consequences of going-concern opinions besides declines in market value. Thus going-concern opinions might be useful for outside stakeholders to predict future organizational changes within companies.

Keywords: going-concern opinion; blockholder; institutional investor; executive compensation; management turnover

JEL Classification: M4