In Denial? Stock Market Underreaction to Going-Concern Audit Report Disclosures

Posted: 21 Oct 2004

See all articles by Richard Taffler

Richard Taffler

Manchester Business School

Junhua Lu

Standard & Poor's

Asad Kausar

American University - Kogod School of Business; Nanyang Technological University (NTU); Nanyang Technological University


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

Taffler, Richard J. and Lu, Junhua and Kausar, Asad, In Denial? Stock Market Underreaction to Going-Concern Audit Report Disclosures. Journal of Accounting and Economics, Vol. 38, Nos. 1-3, December 2004. Available at SSRN:

Richard J. Taffler (Contact Author)

Manchester Business School ( email )

Crawford House
Oxford Road
Manchester M13 9PL
United Kingdom

Junhua Lu

Standard & Poor's ( email )

London EC2M 7NJ
United Kingdom
+442071768453 (Phone)

Asad Kausar

American University - Kogod School of Business ( email )

4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States

Nanyang Technological University (NTU) ( email )

S3 B2-A28 Nanyang Avenue
Singapore, 639798

Nanyang Technological University ( email )

Nanyang Business School
Singapore, 639798

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