Anticipation and Reaction to Going‐Concern Modified Audit Opinions by Sophisticated Investors

14 Pages Posted: 23 Oct 2018

See all articles by Marshall A. Geiger

Marshall A. Geiger

University of Richmond

Abdullah Kumas

University of Richmond - Robins School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: November 2018

Abstract

The purpose of this paper is to examine whether institutional investors (i) anticipate a distressed firm's receipt of a first‐time going‐concern modified audit opinion, and (ii) react to a first‐time going‐concern modified opinion by engaging in abnormal net selling of firm shares. Using a proprietary database of US institutional investor trades, we find that institutional investors are net sellers of first‐time going‐concern opinion firms beginning 6 months before the release of the report and remain net sellers through the subsequent 3 months. We also find that the severity of the reasons auditors modify their opinions is associated with increased trading activity, but only after the opinion is publicly available. Our results support the position that an auditor's going‐concern modified opinion is influential in the marketplace by documenting that institutional investors anticipate this price‐relevant information and react through increased selling. The finding of increased net selling of firms with more severe reasons for report modifications provides evidence of the incremental informational value of the wording in the modified opinion.

Keywords: auditor opinions, going concern, institutional investors

Suggested Citation

Geiger, Marshall A. and Kumas, Abdullah, Anticipation and Reaction to Going‐Concern Modified Audit Opinions by Sophisticated Investors (November 2018). International Journal of Auditing, Vol. 22, Issue 3, pp. 522-535, 2018, Available at SSRN: https://ssrn.com/abstract=3271235 or http://dx.doi.org/10.1111/ijau.12135

Marshall A. Geiger (Contact Author)

University of Richmond ( email )

28 Westhampton Way
Richmond, VA 23173
United States
804-287-1923 (Phone)

Abdullah Kumas

University of Richmond - Robins School of Business ( email )

28 westhampton way
Richmond, VA virginia 23173
United States

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