Richard J Taffler
Cranfield School of Management, U.K.
Jeffrey Lu
Cranfield School of Management, U.K.
Abstract: There is an increasing body of research suggesting the market takes time to assimilate bad news, in contrast to a more timely incorporation of positive news.
This research explicitly sets out to explore the price reaction to going-concern audit report disclosures over the one calendar year period subsequent to their publication in the firms annual report. Is the going-concern modification impounded fully on or around the release date or does the market underreact, taking time to absorb this new information.
In the year following the going-concern disclosure event, our sample firms underperform by between 24% and 43% relative to an appropriate benchmark, depending on the returns measurement methodology. This market underreaction cannot be explained by potentially confounding factors, nor is it a post-earnings announcement drift effect.
Our results have implications for the markets ability to impound bad news appropriately and the incompleteness of arbitrage in such loser firm situations.
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