The horse has bolted: revisiting the market reaction to going concern modifications of audit reports

Authors: Herbohn, Kathleen¹; Ragunathan, Vanitha¹; Garsden, Robert¹

Source: Accounting and Finance, Volume 47, Number 3, September 2007 , pp. 473-493(21)

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Abstract:

This paper examines what value is added by an audit report through an investigation of the information content for first-time going concern modifications (GCMs). Consistent with prior research, we find no evidence of a short-term market reaction to the public announcement of a first-time GCM. We document a significant adverse medium-term market reaction in the 12 months prior to a first-time GCM announcement, but find no evidence of a persistent market underreaction in the 12 months following the announcement. These results are consistent with an audit opinion fulfilling an attestation function and confirming the deteriorating financial condition of a firm.

Keywords: Audit report disclosures; Going concern modifications; Information content; Market efficiency; G14; M41; M42

Document Type: Research article

DOI: 10.1111/j.1467-629X.2007.00216.x

Affiliations: 1: UQ Business School, University of Queensland, Brisbane, 4072, Australia