Market Information and Predictive Accuracy of the Going Concern Opinion

52 Pages Posted: 21 Aug 2003

See all articles by Kannan Raghunandan

Kannan Raghunandan

Florida International University (FIU) - School of Accounting

K.R. Subramanyam

University of Southern California - Leventhal School of Accounting

Date Written: August 2003

Abstract

We find a model that uses both financial statement and market information is an unambiguously superior predictor of bankruptcy than the going concern (audit) opinion. However, the audit opinion has incremental predictive ability for bankruptcy beyond both financial statement and market-based variables, suggesting that financial statement and market information in combination is not a sufficient statistic for the information and expertise of the auditor. A comparison of the audit opinion and bankruptcy prediction models indicates the auditors' inferior performance vis-a-vis the model likely arises because auditors do not correctly use public (financial and market) information. In particular, auditors appear to underweight stock price information but overweight conventional financial statement ratios, cash flow from operations and firm size (measured by total assets) when issuing going concern opinions.

JEL Classification: G33, M49

Suggested Citation

Raghunandan, Kannan and Subramanyam, K.R., Market Information and Predictive Accuracy of the Going Concern Opinion (August 2003). Available at SSRN: https://ssrn.com/abstract=427682 or http://dx.doi.org/10.2139/ssrn.427682

Kannan Raghunandan

Florida International University (FIU) - School of Accounting ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States
305-348-2582 (Phone)

K.R. Subramanyam (Contact Author)

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States
213-740-5017 (Phone)
213-747-2815 (Fax)

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