Do going concern opinions provide incremental information to predict corporate defaults?

Review of Accounting Studies, forthcoming

55 Pages Posted: 4 Feb 2017 Last revised: 7 May 2020

See all articles by Elizabeth F. Gutierrez

Elizabeth F. Gutierrez

Universidad de Chile

Jake Krupa

University of Miami

Miguel Minutti-Meza

University of Miami - Department of Accounting

Maria Vulcheva

Florida International University

Date Written: November 26, 2019

Abstract

Investors, regulators, and academics question the usefulness of going concern opinions (GCOs). We assess whether GCOs provide incremental information, relative to other predictors of corporate default. Our measure of incremental information is the additional predictive power that GCOs give to a default model. Using data from 1996 to 2015, initially we find no difference in predictive power between GCOs alone and a default model that includes financial ratios. However, there is an imperfect overlap between GCOs and other predictors. We show that GCOs increase the predictive power of several models that include ratios, market variables, probability of default estimates, and credit ratings. Using a model that includes ratios and market variables, GCOs increase the number of predicted defaults by 4.4 percent, without increasing Type II errors. Our findings suggest that GCOs summarize a complex set of conditions not captured by other predictors of default.

Keywords: going concern opinions; predictive accuracy; Type I and II errors; audit quality

Suggested Citation

Gutierrez, Elizabeth F. and Krupa, Jake and Minutti-Meza, Miguel and Vulcheva, Maria, Do going concern opinions provide incremental information to predict corporate defaults? (November 26, 2019). Review of Accounting Studies, forthcoming, Available at SSRN: https://ssrn.com/abstract=2910604 or http://dx.doi.org/10.2139/ssrn.2910604

Elizabeth F. Gutierrez

Universidad de Chile ( email )

Pío Nono Nº1, Providencia
Santiago, R. Metropolitana 7520421
Chile

Jake Krupa

University of Miami ( email )

Coral Gables, FL 33124
United States

Miguel Minutti-Meza (Contact Author)

University of Miami - Department of Accounting ( email )

Coral Gables, FL 33146-6531
United States
305-284-6287 (Phone)

Maria Vulcheva

Florida International University ( email )

11200 SW 8 Street RB244B
Miami, FL 33199
United States

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