Investor Reaction to Auditors’ Going Concern Emphasis of Matter: Evidence from a Natural Experiment
70 Pages Posted: 23 Jan 2016 Last revised: 24 Jan 2018
Date Written: January 22, 2018
This paper provides evidence on the incremental investor reaction to a going concern emphasis of matter paragraph (GC-EOM) in the auditor’s report over financial statements disclosure of a going concern uncertainty (GC-FS). We make use of a “natural experiment” provided by a change in Canadian auditing standards requiring a GC-EOM, allowing to empirically examine the investor reaction to a GC-EOM separately from the related GC-FS. Conditioning on the severity level of GC-FS disclosures (weak and severe), we first document that investors responded to severe but not weak GC-FS disclosures in the pre-EOM period. This implies that investors react to GC-FS disclosures and account for its degree of interpretability in the absence of a GC-EOM. When accompanied by a GC-EOM, we find incremental negative abnormal returns and lower abnormal trading volume for weak GC-FS disclosures. Regarding severe GC-FS accompanied by a GC-EOM, we find incremental negative abnormal returns for repeat disclosures only. Collectively, these findings imply that a GC-EOM can have incremental value to investors.
Keywords: going concern, auditor's report, emphasis of matter paragraph, perceived financial reporting quality
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