Prediction versus Inducement and the Informational Efficiency of Going Concern Opinions

49 Pages Posted: 5 Feb 2016

See all articles by Joseph J. Gerakos

Joseph J. Gerakos

Tuck School of Business at Dartmouth College; Dartmouth College - Tuck School of Business

Richard Hahn

University of Chicago - Booth School of Business

Andrei Kovrijnykh

Arizona State University (ASU)

Frank Zhou

University of Chicago - Booth School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: January 31, 2016

Abstract

We examine two distinct channels through which going concern opinions can be associated with the likelihood of bankruptcy: auditors have better access to information about their clients' bankruptcy risk and going concern opinions directly induce bankruptcies. Using a bivariate probit model that addresses omitted variable bias arising from auditors' additional information, we find support for both the information and inducement channels. The direct inducement effect of receiving a going concern opinion is a 1.5 percentage point increase in the probability of bankruptcy. Despite the direct effect acting as a "self-fulfilling" prophecy, going concern opinions do not predict more bankruptcies than a statistical model based solely on observable data, which suggests that auditors do not efficiently use information when generating going concern opinions.

Suggested Citation

Gerakos, Joseph J. and Hahn, Richard and Kovrijnykh, Andrei and Zhou, Frank, Prediction versus Inducement and the Informational Efficiency of Going Concern Opinions (January 31, 2016). Chicago Booth Research Paper No. 16-01. Available at SSRN: https://ssrn.com/abstract=2727771 or http://dx.doi.org/10.2139/ssrn.2727771

Joseph J. Gerakos (Contact Author)

Tuck School of Business at Dartmouth College ( email )

Hanover, NH 03755
United States

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

Richard Hahn

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Andrei Kovrijnykh

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States
480-965-6216 (Phone)

Frank Zhou

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
230
rank
74,151
Abstract Views
1,395
PlumX Metrics