Going-Concern Opinions, Corporate Control, Executive Compensation and Management Turnover

• In Event: Continental Breakfast and Research & Education Forum
  In Roundtable Session: Table 3: Going Concern Opinions and Financially Distressed Firms

Abstract

We investigate economic consequences of going-concern opinions in terms of corporate control, executive compensation and management turnover. We argue that announcement of going-concern opinions either decreases firm value or signals negatively to investors. Therefore, upon the announcement of these opinions, companies are motivated to go through organizational changes to strengthen monitoring and restore investors’ confidence. These organizational changes include modifications in corporate ownership, executive compensation and management turnover. Based on a sample period of 1995 – 2012 and using a difference-in-difference approach, we find that the existence of going-concern opinions results in decreases in ownerships of blockholders and institutional investors. In addition, the presence of these opinions decreases CEO compensation and increases subsequent turnovers of top managers and auditors. Our findings point out other adverse consequences of going-concern opinions besides declines in market value. Thus going-concern opinions are useful for outside stakeholders to predict future organizational changes within companies.

Authors

• Bill Francis, Rensselaer Polytechnic Institute

• Ning Ren, Rensselaer Polytechnic Institute

• Yinghong Zhang, Rensselaer Polytechnic Institute

• Yun Zhu, Rensselaer Polytechnic Institute