Does Institutional Investor Behavior Influence the Market Reaction to Going Concern Audit Reports?

Kaplan, Steven E.; Mowchan, Michael J.

doi:10.2139/ssrn.2433626

Cited by 5 publications

(8 citation statements)

References 33 publications

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“…Moreover, we detect that negative reactions are not simply due to the audit opinion type and/or modification; rather, they are attributed to the joint reading of both audit opinions and firms' financial highlights. Conducting additional tests, this study also finds that recurring GCMs have a higher negative impact on investors, a result that is the opposite of that of the mainstream literature (Blay and Geiger 2001;Blay et al 2016;Geiger and Kumas 2018;Herbohn et al 2007;Kaplan et al 2014;Menon and Williams 2010), which assigns this role to first GCMs. Finally, we also show how GCMs released for the FSs of blacklisted companies determine a more severe adverse reaction among investors.…”

Section: Introductionmentioning

confidence: 55%

“…Recently, Mock et al (2013) have reinforced this orientation, finding that "unless 'new' information is provided, a GC modified audit report does not appear to have significant information content". For this reason, many authors (Blay and Geiger 2001;Blay et al 2016;Geiger and Kumas 2018;Herbohn et al 2007;Kaplan et al 2014; Menon and Williams 2010) test investors' reaction only to first-time GCMs. The results of these studies generally show a negative reaction to first-time GCMs, with the exception of Herbohn et al (2007), who found that first-time GCMs lead to a significant adverse market reaction prior to the event date; however, they did not find evidence of a persistent reaction after the announcement.…”

Section: Audit Report Releases and Stock Market Reactions: Literaturementioning

confidence: 99%

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Going concern modifications and related disclosures in the Italian stock market: do regulatory improvements help investors in capturing financial distress?

et al. 2020

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This paper investigates the investor reaction to audit reports containing a going concern modification (GCM) in the Italian market following new amendments regarding auditing regulations and public financial information disclosures. We applied the event study (ES) methodology to short event windows considering Italian listed companies during the period 2009–2015. Our findings partially contradict previous studies revealing a systematic negative impact of GCMs, especially when a GCM is attached to unqualified opinions. We clearly observe that Italian auditors have a strong higher propensity to issue a GCM than to express a qualification. Moreover, we find other interesting results that contradict the mainstream literature, detecting a stronger negative reaction in the case of recurring GCMs and when the modification is issued by non-Big 4 auditing firms. These differences could be explained considering the environmental characteristics of the Italian market such as the ownership structure, governance mechanisms and accounting culture, where minority investors act against ownership in accordance with the type II agency problem. Our empirical results suggest that the domestic and international regulatory amendments during the study period have increased the value relevance of GCMs and the usefulness of financial disclosures. This study might be of interest to practitioners and regulators in regard to contributing to the introduction of further regulatory interventions that will enhance both the informativeness of audit reports and awareness of investors in regard to going concern uncertainty.

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Section: Introductionmentioning

confidence: 55%

Section: Audit Report Releases and Stock Market Reactions: Literaturementioning

confidence: 99%

Going concern modifications and related disclosures in the Italian stock market: do regulatory improvements help investors in capturing financial distress?

et al. 2020

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“…Archival research conducted on the effect of modified audit reports related to the appropriateness of the going concern assumption revealed mixed results (see literature synthesis by Carson et al, 2013). Some studies found significant adverse price reactions (Fleak & Wilson, 1994;Citron, Taffler & Uang, 2008;Menon & Williams, 2010;Kaplan, Mowchan & Weisbrod, 2014), while others did not (Herbohn, Ragunathan & Garsden, 2007;Ogneva & Subramanyam, 2007). An experimental study by Pringle, Crum and Swetz (1990) on the effect of different report formats regarding 'subject to' qualifications for going concern uncertainties failed to show a significant impact on investment preferences.…”

Section: Reactions To Audit Reportsmentioning

confidence: 99%

Bank Directors’ Perceptions of Expanded Auditor's Reports

Boolaky

Quick

2016

Int J Auditing

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Subsequent to the financial crisis, standard setters developed suggestions for enhancing the audit function, in order to increase financial stability. One related idea is to expand the audit report disclosed to the public, to ensure that it is fit for purpose. This study investigates the impact of expanded audit reports, namely information on the assurance level, materiality levels and key audit matters (KAM), on bank director perceptions of the quality of the financial statements, the audit and the audit report, as well as on their credit approval decisions. We conduct an experiment involving a sample of 105 bank directors and use ANCOVA to determine the predictors of bank director perceptions and decisions. Our findings suggest that disclosing the assurance level has a significantly positive impact. In contrast, we cannot demonstrate a material effect of expanding the audit report to include the materiality level or KAM. As a consequence, standard setters should carefully analyse the effect of additional information before making decisions on expanding the content of the audit report. Such expansions are not necessarily perceived as useful by stakeholders.

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“…The sample is further restricted to firms with S&P long-term issuer credit ratings available in Compustat which yields a final sample of 12,674 firm-year observations with 105 firsttime GCOs. 87 This approach is consistent with other studies in the auditing literature, such as Jones (1996); Herbohn, Ragunathan, and Garsden (2007); Blay and Geiger (2001); and Kaplan, Mowchan and Weisbrod (2014), and is commonly used since the GCO is the first notification from auditors to investors that the assessed firm might not be able to continue as going concern in the future. Investors are likely to have different expectations with respect to repeat GCOs, which is why they are excluded from the analyses.…”

Section: Samplesupporting

confidence: 65%

“…In order to assess the hypotheses regarding the market reaction of investors to a GCO conditional on credit rating changes or changes in analyst recommendations, I follow prior literature that examines market reactions to GCOs (Menon and Williams 2010;Kaplan et al 2014) and use the following OLS model: 88…”

Section: Empirical Modelmentioning

confidence: 99%

Credit ratings & the auditor’s going-concern opinion : the interplay of information intermediaries’ signals

Funcke

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Does Institutional Investor Behavior Influence the Market Reaction to Going Concern Audit Reports?

Cited by 5 publications

References 33 publications

Going concern modifications and related disclosures in the Italian stock market: do regulatory improvements help investors in capturing financial distress?

Going concern modifications and related disclosures in the Italian stock market: do regulatory improvements help investors in capturing financial distress?

Bank Directors’ Perceptions of Expanded Auditor's Reports

Credit ratings & the auditor’s going-concern opinion : the interplay of information intermediaries’ signals

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