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Institutional Flight and Market Responses to Going Concern Audit Reports

Sat, January 18, 7:30 to 8:30am, TBA

Abstract

The informativeness of going concern reporting remains an open question as prior research provides mixed evidence on the reports usefulness. We investigate the incremental market reaction to first-time going concern audit reports (GCARs). We also extend prior work on both the determinants and usefulness of GCAR modifications by recognizing that the information content of the GCAR must also be evaluated alongside the decisions of other sophisticated or informed parties in the marketplace. We find that, on average, the market exhibits an incrementally negative short-window abnormal return and incremental increase in market-adjusted share turnover for GCAR firms relative to similarly stressed non-GCAR firms. We also find synergies among the behavior of auditors and institutional investors, such that, financially stressed firms that experience greater institutional flight (i.e., net selling among institutional investors) over the preceding year are more likely to receive a first-time GCAR. Furthermore, our results suggest that the magnitudes of the incremental negative abnormal return and incremental market-adjusted share turnover that are associated with a first-time GCAR depend upon the extent of institutional flight in the preceding year. These findings provide evidence that auditors make assessments similar to those of sophisticated institutional investors in regard to a firm’s level of financial distress, and that the market benefits from being able to observe, in tandem, the decisions of both parties.

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