AAA Spark Meeting of Regions

Does Going Concern Opinion Deter Stock Price Crashes?

• In Event: Going Concern Opinions

Abstract

Motivated by the increasing frequency of going concern opinions (GCOs) issuance and recent stock price crashes, we investigate the deterring effect of GCOs on stock price crash risk. We argue and demonstrate that the issuance of GCOs as a communication channel, disseminating bad news and facilitating investors’ incorporation of bad news, leads to lower stock price crash risk. Further analysis shows that information asymmetry, including high bid-ask spread, low analyst coverage, and low media coverage, moderates the negative relationship between GCOs and stock price crash risk. The sentiment of information channels, including financial reporting, investors, and media, also plays a moderator role. The negative relationship between GCOs and stock price crash risk is more pronounced when other information channels have high sentiment contradicting the negative sentiment of GCOs. The negative relationship between GCOs and stock price crash risk is robust to a Heckman model, alternative measures, and alternative sample selections. Our findings support regulators’ effort of increasing the value of GCOs and highlight GCOs by interacting with other information channels.

Authors

• Huimin Chen, University of Massachusetts-Lowell

• Khondkar E Karim, University of Massachusetts-Lowell

• Xiao Yu, University of Massachusetts Lowell