Interpreting Auditors’ Going Concern Opinions: Who Knows Who Is Going Bankrupt?

• In Event: Going Concern, Auditor Independence, and Investor Reactions

Abstract

This study investigates whether investors differentiate between auditors’ going concern audit reports (GCAR) that are followed by bankruptcy (‘substantiated’ GCAR) and those that are not followed by bankruptcy (‘unsubstantiated’ GCAR). We predict that the most sophisticated investors (dedicated institutional investors as classified by Bushee [1998]) possess superior insight into whether a GCAR will be followed by bankruptcy. We find an overall negative reaction to the issuance of a GCAR; however, dedicated institutional presence diminishes the negative reaction when the GCAR is not followed by bankruptcy. Furthermore, we find some evidence that dedicated investors advantageously increase their ownership stake following an unsubstantiated GCAR. Taken together, our results indicate that dedicated investors have superior insights into outcomes following GCARs resulting in trading advantages over other investors.

Authors

• Jonathan Shipman, The University of Tennessee–Knoxville

• Quinn Thomas Swanquist, The University of Tennessee–Knoxville

• Robert Lowell Whited, The University of Tennessee–Knoxville