Does Institutional Investor Behavior Influence the Market Reaction to Going Concern Audit Reports?

50 Pages Posted: 7 May 2014

See all articles by Steven E. Kaplan

Steven E. Kaplan

Arizona State University

Michael J. Mowchan

Baylor University

Eric H. Weisbrod

University of Kansas - School of Business

Date Written: April 29, 2014

Abstract

We investigate the incremental market reaction to first-time going concern audit reports (GCARs) relative to similarly distressed non-GCAR firms. We utilize a matched-sample research design to show that first-time GCARs are associated with incremental negative abnormal returns and increases in market-adjusted share turnover at the annual report filing date. Moreover, our results indicate that greater net selling by institutional investors (i.e., institutional flight) during the fiscal year increases the magnitude of these associations. We also find that first-time GCARs signal an increased likelihood of bankruptcy and weaker operating performance in the subsequent year, and that institutional flight prior to the GCAR moderates the severity of these signals. Taken together, our findings provide new evidence that first-time GCARs are incrementally informative beyond other financial statement information, and that the informativeness of the auditor’s GCAR decision is moderated by the observed trading decisions of institutional investors.

Keywords: Audit Report, Going Concern, Institutional Ownership, Institutional Flight, Market Reaction, Bankruptcy

Suggested Citation

Kaplan, Steven E. and Mowchan, Michael J. and Weisbrod, Eric H., Does Institutional Investor Behavior Influence the Market Reaction to Going Concern Audit Reports? (April 29, 2014). Available at SSRN: https://ssrn.com/abstract=2433626 or http://dx.doi.org/10.2139/ssrn.2433626

Steven E. Kaplan

Arizona State University ( email )

Tempe, AZ 85287
United States
602-965-6498 (Phone)
602-965-8392 (Fax)

Michael J. Mowchan

Baylor University ( email )

Waco, TX 76798
United States

Eric H. Weisbrod (Contact Author)

University of Kansas - School of Business ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States

HOME PAGE: http://https://business.ku.edu/eric-weisbrod

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