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An International Meeting of American Accounting
Association
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Anomalous price reaction and differential stockholder response to going-concern audit opinions and withdrawals |
Asad Kausar
University of Manchester
Richard J Taffler
University of Edinburgh
Christine E Tan
Baruch College - CUNY
Christine E Tan
Baruch College - CUNY
Abstract: We explore the medium-term market reaction to going-concern opinions (bad news) and withdrawal of going-concern opinion audit reports (good news) for 845 firms from 1994 to 2002. Results show asymmetric market response to these accounting system disclosures. The market underreacts to such bad news signals, resulting in a subsequent downward drift of around -16% over the one-year period subsequent to the going-concern opinion, but fully anticipates the good news. This post-GCM announcement drift is distinct from other established anomalies; however, we find no such evidence for going-concern cases with positive earnings surprise. Additional analyses of stockholder trading activities reveal that institutional investors reduce their holdings in such stocks on a timely basis in contrast to retail investors. Our results indicate auditors are providing clear messages to financial statement users but their information content is not being fully impounded by the market on a timely basis.