The Market's Response to Earnings Surprises After First-Time Going-Concern Modifications

Advances in Accounting, June 2015, 31 (1): 21-32

Posted: 20 Dec 2017

See all articles by Bei Dong

Bei Dong

University of South Florida - School of Accountancy

Dahlia Robinson

University of South Florida

Michael Robinson

University of Tampa

Date Written: 2015

Abstract

This study investigates the market's response to earnings surprises after first-time going-concern modifications (GCMs). Using a sample of 581 firms and an events-study research design, we document a significant decrease in earnings response coefficients (ERCs) in the quarters following the GCM. However, this result appears to be driven by firms for which the GCM is unexpected. Specifically, we find that firms with high Z-scores prior to the GCM experience an immediate and prolonged decline in ERCs over the four quarters after the GCM, but find no change in ERCs for those firms with low Z-scores. These results are consistent with the GCM potentially resolving investors' fundamental uncertainty about future cash flows, and/or signaling that the earnings numbers generated by the firm are noisier or less persistent than was previously assumed. Further, we find no change in ERCs for a propensity-score matched control sample that did not receive GCMs, suggesting that the decline in earnings informativeness is not a response to general economic conditions. Finally, we document that institutional investors incorporate the information in the GCM. The study makes an important contribution to the going-concern literature by documenting that GCMs influence the pricing of earnings.

Keywords: Going-Concern Modifications, Earnings Response Coefficients, Informativeness of Earnings, Institutional Investors

JEL Classification: G14, M41, M42, M4

Suggested Citation

Dong, Bei and Robinson, Dahlia and Robinson, Michael, The Market's Response to Earnings Surprises After First-Time Going-Concern Modifications (2015). Advances in Accounting, June 2015, 31 (1): 21-32. Available at SSRN: https://ssrn.com/abstract=3090349

Bei Dong (Contact Author)

University of South Florida - School of Accountancy ( email )

4202 E. Fowler Avenue, BSN 3403
Tampa, FL 33620-5500
United States
813-974-0154 (Phone)

Dahlia Robinson

University of South Florida ( email )

4202 E. Fowler Avenue, BSN 3403
Tampa, FL 33620-5500
United States
8139746888 (Phone)

Michael Robinson

University of Tampa ( email )

401 W Kennedy Blvd
Tampa, FL 33606
United States

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