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The intraindustry effects of going concern audit reports

Author

Listed:
  • Luís M.S. Coelho

    (School of Economics University of the Algarve and CEFAGE)

  • Ruben M.T. Peixinho

    (School of Economics University of the Algarve and CEFAGE)

  • Siri Terjensen

    (Kelley School of Business University of Indiana)

Abstract

This paper investigates the effect of a going concern opinion (GCO) on the equity value of the announcing firm’s competitors. On average, GCOs increase the value of a value-weighted portfolio of rivals by 0.37% at the event date. This positive effect is significantly larger when the announcing firm is relatively more profitable, the industry is more concentrated, and when rivals and event firms have distinct assets in place and growth opportunities. Additional tests reveal that such competitive effect is not a mere short-term phenomenon as investors can earn up to 1.54% on a risk-adjusted basis over the first postGCO month. This finding is especially interesting as we show that for the industry rivals the one-year and six-month preGCO riskadjusted equity returns are, on average, strongly negative. Our results highlight the impact of mandatory accounting information on market prices at both the firm and industry levels.

Suggested Citation

  • Luís M.S. Coelho & Ruben M.T. Peixinho & Siri Terjensen, 2011. "The intraindustry effects of going concern audit reports," CEFAGE-UE Working Papers 2011_23, University of Evora, CEFAGE-UE (Portugal).
    • Handle: RePEc:cfe:wpcefa:2011_23
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    References listed on IDEAS

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    Keywords

    Audit reports; Going concern; Competitive effect; Contagion effect.;
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