An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Jonathan D. Stanley
The University of Alabama

F. Todd Dezoort
The University of Alabama

Gary K. Taylor
The University of Alabama

Abstract: This study examines whether insider trading surrounding a first-time going concern audit opinion (GCO) is associated with a firm’s future bankruptcy status. We develop and test hypotheses predicting that insiders of firms receiving GCOs trade in a manner consistent with private assessments of the firms’ bankruptcy risk. As predicted, univariate and logistic regression analysis of 365 firms receiving GCOs between 1996 and 2001 indicate that changes in top executives’ net selling (i.e., sales less purchases) immediately before and after the GCO are positively associated with the likelihood of future bankruptcy over the following two years. Supplemental analysis reveals this finding is a function of insiders within the bankrupt sample reporting fewer purchase transactions surrounding the GCO event.

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