The Informative Value of the Auditors’ Going-Concern Opinion Incremental to Signals from Other Information Intermediaries

• In Event: Audit Quality 1

Abstract

This paper examines the stock market reaction to the auditors’ going concern opinion (GCO) conditional on information previously provided by other professional market intermediaries. The value of auditors’ GCOs to equity investors has been debated widely and existing literature argues that markets only value GCOs when they are unexpected. This paper thus analyzes whether preceding signals regarding firms’ future viability by credit rating agencies and equity analysts alter the market’s reactions to GCOs. The evidence reveals that investors react less strongly to GCOs which have been preceded by credit rating downgrades or downward revisions of analysts’ cash flow forecasts. Only when these signals predict that there is little to no ambiguity that a GCO is expected, market reactions to GCOs are statistically not different from zero. Changes in analyst investment recommendations only seem to function as a warning signal of an approaching GCO in cases of very severe downward revisions. Given that these severe revisions are very rare, I conclude that markets overall value GCOs above and beyond information provided by other information intermediaries. These findings are relevant for investors, practitioners and especially regulators who are currently debating to restructure auditors’ GCO reports to make them more informative.

Author

• Nadine Funcke, Erasmus University