The Going-Concern Market Anomaly Revisited

• In Event: Audit Reports

Abstract

Kauser, Taffler and Tan (2009) document a going-concern market anomaly in the U.S., resulting in a sizable downward drift over the subsequent one-year period for first-time going-concern recipients, relative to a size and book to market matched control sample. The authors argue that the adverse signals regarding viability are not being impounded appropriately by the market on a timely basis. We argue that the documented drift is a result of failing to control for financial statement risks identifiable to the market, and likely used by the auditor in reaching a going-concern decision. We replicate Kauser et al.’s results in the 2001-2010 time period and document a sizable abnormal drift using their original matching procedure based on market measures. However, upon matching on firm-level financial risk characteristics that auditors use to reach a going-concern opinion, as done in the majority of the auditing going-concern literature, the mean drift disappears completely in all event windows. We further show that the originally documented drift is limited to medium sized going-concern firms with low institutional ownership and relatively less financial distress. These results provide evidence that after controlling for identifiable risk characteristics present in the financial statements, the market correctly impounds the information present in the auditor’s going-concern opinion.

Authors

• Allen D Blay, Florida State University

• David Bryan, Florida State University

• J Kenneth Reynolds, Florida State University