The Asymmetric Market Reaction of Stockholders and Bondholders to the Implementation of Early-Warnings Pre Going Concern Opinion

34 Pages Posted: 10 Feb 2016

See all articles by Keren Bar-Hava

Keren Bar-Hava

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Roi Katz

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Date Written: February 9, 2016

Abstract

Auditing standards requiring auditors to issue going concern opinions (GCOs) have existed for several decades. The FASB exposure draft of June 2013 suggests early disclosures of uncertainties about an entity’s ability to continue as going concerns (GCUs). The FASB’s board argues that the proposed amendments would improve the timeliness and the quality of disclosures of going concern opinions. In Israel, since 2008, about 70% of the publicly traded companies implemented the two-phase models for going concern auditors’ opinions. We utilize a hand-collected dataset of 143 GCOs of publicly traded companies for the years 2007-2013. We examine the stockholders’ and bondholders’ reactions to GCOs preceded by early warnings of uncertainty (GCUs) compared to companies where the GCO disclosure tracks a “clean” opinion. The findings indicate that the equity and debt market reacts to GCUs in a negative and economically significant fashion. In addition, we find that GCUs reduce the negative market reaction to GCOs. This finding indicates that GCU announcements improve the timing and quality of the financial statement disclosure.

Keywords: Going-concern Uncertainty; International Auditing Standards; International Auditing Practices; Audit opinions; Disclaimer of opinion; Financial condition; Short-term market reaction

JEL Classification: M41, M42, G14, G24

Suggested Citation

Bar-Hava, Keren and Katz, Roi, The Asymmetric Market Reaction of Stockholders and Bondholders to the Implementation of Early-Warnings Pre Going Concern Opinion (February 9, 2016). Available at SSRN: https://ssrn.com/abstract=2729774 or http://dx.doi.org/10.2139/ssrn.2729774

Keren Bar-Hava (Contact Author)

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel

Roi Katz

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
175
Abstract Views
1,702
Rank
257,695
PlumX Metrics