Investor Sentiment and Going Concern Audit Opinions

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

Abstract

We examine how auditors react to investor sentiment by examining the association between investor sentiment and issuances of going concern opinions to financially distressed clients. Using the Michigan Consumer Confidence index and the index developed by Baker and Wurgler (2006) as proxies for investor sentiment, we find that auditors’ propensity to issue a modified going concern opinion decreases with the level of investor sentiment. While we document some evidence on the relation between investor sentiment and auditor Type I errors (i.e., incorrect going concern opinions), we document that investor sentiment is positively associated with the likelihood of Type II errors (i.e., incorrect clean opinions for bankrupt clients). In further analyses, we find that the association between investor sentiment and going concern opinions is influenced by client litigation risk and firm performance. Overall, we contribute to the line of research examining factors that influence auditor's consideration of a client’s ability to continue as a going concern as well as studies examining the effect of investor sentiment on corporate outcomes.

Authors

• Chan Li, University of Pittsburgh

• Adi Masli, The University of Kansas

• QIAN XU, Peking University

• Yang Xu, University of Colorado at Colorado Springs