Measuring the Market Response to Going Concern Modifications: The Importance of Disclosure Timing

Posted: 11 Feb 2015 Last revised: 8 Nov 2018

See all articles by Linda A. Myers

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Jonathan E. Shipman

University of Arkansas

Quinn Thomas Swanquist

University of Alabama - Culverhouse School of Accountancy

Robert Lowell Whited

North Carolina State University

Date Written: 2018

Abstract

Auditor going concern modifications (GCMs) are intended to provide market participants with information related to financial distress, and prior research suggests that the disclosure of a GCM elicits a substantial negative market reaction from investors. In this study, we investigate the market reaction to GCMs in a contemporary disclosure regime and consider whether the observed market reaction is confounded by other material disclosures. We find that the majority of GCMs are issued concurrently with earnings announcements (EAs) and that EAs in the year of new GCMs elicit large negative cumulative abnormal returns (CARs). We also find that CARs surrounding GCMs are significantly more negative when GCMs are disclosed with EAs versus following EAs. We then evaluate whether GCMs convey distress that is incremental to EA disclosures by measuring i) the market reaction to GCMs disclosed following EAs, and ii) whether EA CARs are substantially more negative for companies disclosing GCMs with EAs as opposed to after EAs. In both cases, we find that the incremental market response to GCMs is statistically weak and much smaller in economic magnitude than is suggested by prior research. Finally, we find that management disclosures in EAs, rather than the presence of a GCM, appear to convey information that investors use to anticipate bankruptcy. Taken together, these findings suggest that GCMs are confounded by other significant disclosures and that the informational benefits of GCM reporting are significantly smaller than previously thought.

Keywords: Going Concern Modifications; Market Reactions; Auditor Reporting

JEL Classification: M40, M41

Suggested Citation

Myers, Linda A. and Shipman, Jonathan E. and Swanquist, Quinn Thomas and Whited, Robert Lowell, Measuring the Market Response to Going Concern Modifications: The Importance of Disclosure Timing (2018). Review of Accounting Studies: December 2018, Volume 23, Issue 4, pp. 1512-1542. Available at SSRN: https://ssrn.com/abstract=2563073 or http://dx.doi.org/10.2139/ssrn.2563073

Linda A. Myers (Contact Author)

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Jonathan E. Shipman

University of Arkansas ( email )

Business Bldg. 454
Fayetteville, AR 72701
United States

Quinn Thomas Swanquist

University of Alabama - Culverhouse School of Accountancy ( email )

Tuscaloosa, AL 35487
United States

Robert Lowell Whited

North Carolina State University ( email )

Raleigh, NC 27695
United States

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