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

See all articles by Jean Bédard

Jean Bédard

Université Laval - École de comptabilité

Carl Brousseau

Université Laval - School of Accounting

Ann Vanstraelen

Maastricht Accounting and Auditing Research and Education Center (MARC); Maastricht University

Date Written: January 22, 2018

Abstract

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

Suggested Citation

Bédard, Jean and Brousseau, Carl and Vanstraelen, Ann, Investor Reaction to Auditors’ Going Concern Emphasis of Matter: Evidence from a Natural Experiment (January 22, 2018). Available at SSRN: https://ssrn.com/abstract=2719877 or http://dx.doi.org/10.2139/ssrn.2719877

Jean Bédard

Université Laval - École de comptabilité ( email )

2325, rue de la Terrasse
Québec, Québec G1V 0A6
Canada
418-656-7055 (Phone)
418-656-2624 (Fax)

Carl Brousseau (Contact Author)

Université Laval - School of Accounting ( email )

Quebec City
Canada

Ann Vanstraelen

Maastricht Accounting and Auditing Research and Education Center (MARC) ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

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