Anomalous Price Reaction and Differential Stockholder Response to Going-Concern Audit Opinions and Withdrawals

52 Pages Posted: 9 Mar 2006

See all articles by Asad Kausar

Asad Kausar

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

Richard Taffler

Manchester Business School

Christine E.L. Tan

City University of New York - Baruch College

Date Written: March 27, 2006

Abstract

We explore the medium-term market reaction to going-concern modified audit opinions and their withdrawal for a large sample of firms from 1994 to 2002. Results show asymmetric market response to these accounting system disclosures. The market underreacts to going-concern opinions, resulting in a subsequent downward drift of around -16% over the one-year period subsequent to the going-concern opinion, but fully anticipates their withdrawal. This post-going-concern announcement drift is distinct from other established anomalies; however, it is limited to those going-concern cases with negative earnings surprise. Nonetheless, adjusting for transactions costs, the opportunity to earn profits by trading on this anomaly is limited and risky. Analysis of stockholder trading activities reveals that institutions reduce their holdings in such stocks on a timely basis in contrast to retail investors. Our results are original, and indicate that auditors are providing clear messages to financial statement users in the going-concern context but their information content is not being fully impounded by the market on a timely basis.

Keywords: Market anomalies, Investor Biases, Limits to arbitrage, Going-concern

JEL Classification: G14, G23, M41, M49

Suggested Citation

Kausar, Asad and Taffler, Richard J. and Tan, Christine, Anomalous Price Reaction and Differential Stockholder Response to Going-Concern Audit Opinions and Withdrawals (March 27, 2006). Available at SSRN: https://ssrn.com/abstract=889282 or http://dx.doi.org/10.2139/ssrn.889282

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
Singapore

Nanyang Technological University ( email )

Nanyang Business School
Singapore, 639798
Singapore

Richard J. Taffler

Manchester Business School ( email )

Crawford House
Oxford Road
Manchester M13 9PL
United Kingdom

Christine Tan (Contact Author)

City University of New York - Baruch College ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3206 (Phone)
646-312-3161 (Fax)

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