In Denial? Stock Market Underreaction to Going-Concern Audit Report Disclosures
Posted: 21 Oct 2004
We investigate the stock price reaction to UK going-concern audit report disclosures in the calendar year subsequent to publication. Over this period our firm population underperforms by between 24% and 31% depending on the benchmark adopted. This market underreaction to such an unambiguous bad news release is not a post-earnings announcement drift phenomenon; it is also robust to other potentially confounding explanations. However, whatever the reasons for such stock mispricing, we find costly arbitrage prevents rational investors forcing prices back into line with fundamental value. Our results have implications for the market's ability to impound bad news appropriately and the incompleteness of arbitrage in such small "loser" firm situations.
Keywords: Market anomalies, Investor biases, Behavioral finance, Limits to arbitrage
JEL Classification: G14, M41, M47, M49
Suggested Citation: Suggested Citation