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

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  • Kathleen Herbohn
  • Vanitha Ragunathan
  • Robert Garsden

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.

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  • Kathleen Herbohn & Vanitha Ragunathan & Robert Garsden, 2007. "The horse has bolted: revisiting the market reaction to going concern modifications of audit reports," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 47(3), pages 473-493, September.
    • Handle: RePEc:bla:acctfi:v:47:y:2007:i:3:p:473-493
    DOI: 10.1111/j.1467-629X.2007.00216.x
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    References listed on IDEAS

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    1. Mutchler, Jf, 1985. "A Multivariate-Analysis Of The Auditors Going-Concern Opinion Decision," Journal of Accounting Research, Wiley Blackwell, vol. 23(2), pages 668-682.
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    6. Edward I. Altman, 1968. "The Prediction Of Corporate Bankruptcy: A Discriminant Analysis," Journal of Finance, American Finance Association, vol. 23(1), pages 193-194, March.
    7. Dopuch, Nicholas & Holthausen, Robert W. & Leftwich, Richard W., 1986. "Abnormal stock returns associated with media disclosures of `subject to' qualified audit opinions," Journal of Accounting and Economics, Elsevier, vol. 8(2), pages 93-117, June.
    8. Max Bessell & Asokan Anandarajan & Ahson Umar, 2003. "Information content, audit reports and going‐concern: an Australian study," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 43(3), pages 261-282, November.
    9. Titman, Sheridan & Trueman, Brett, 1986. "Information quality and the valuation of new issues," Journal of Accounting and Economics, Elsevier, vol. 8(2), pages 159-172, June.
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    Citations

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    Cited by:

    1. Nirosh Karuppu, 2009. "Evidence on Auditors Use of Business Continuity Models as an Analytical Procedure," Accounting & Taxation, The Institute for Business and Finance Research, vol. 1(1), pages 63-74.
    2. repec:mth:ijafr8:v:9:y:2019:i:1:p:135-151 is not listed on IDEAS
    3. Ashraf, Dawood & Rizwan, Muhammad Suhail & Azmat, Saad, 2018. "The Role of Ownership and Governance Mechanism in Sukuk Financing by Malaysian Firms: An Application of A Double Selection Model," Working Papers 2018-2, The Islamic Research and Teaching Institute (IRTI).
    4. Dong, Bei & Robinson, Dahlia & Robinson, Michael, 2015. "The market's response to earnings surprises after first-time going-concern modifications," Advances in accounting, Elsevier, vol. 31(1), pages 21-32.
    5. Sandro Brunelli & Chiara Carlino & Rosella Castellano & Alessandro Giosi, 2021. "Going concern modifications and related disclosures in the Italian stock market: do regulatory improvements help investors in capturing financial distress?," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 25(2), pages 433-473, June.
    6. Marilena Mironiuc & Ioan-Bogdan Robu & Mihaela-Alina Robu, 2011. """Going Concern"" And The Effects Of The Operational Cycle Management. An Empirical Study Concerning The Usage Of Financial Analysis For Obtaining Preliminary Proofs In The Task Of," Analele Stiintifice ale Universitatii "Alexandru Ioan Cuza" din Iasi - Stiinte Economice (1954-2015), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 2011, pages 41-53, july.
    7. Elizabeth Carson & Neil Fargher & Yuyu Zhang, 2016. "Trends in Auditor Reporting in Australia: A Synthesis and Opportunities for Research," Australian Accounting Review, CPA Australia, vol. 26(3), pages 226-242, September.
    8. Ruben M.T. Peixinho & Richard J. Taffler, 2011. "Are analysts misleading investors? The case of goingconcern opinions," CEFAGE-UE Working Papers 2011_22, University of Evora, CEFAGE-UE (Portugal).
    9. Dennis M. O'Reilly, 2010. "Do investors perceive the going-concern opinion as useful for pricing stocks?," Managerial Auditing Journal, Emerald Group Publishing, vol. 25(1), pages 4-16, February.
    10. Martinez-Blasco, Monica & Garcia-Blandon, Josep & Vivas-Crisol, Laura, 2016. "El informe de auditoría con salvedades: ¿una mayor independencia y competencia del auditor aumenta su contenido informativo?," Revista de Contabilidad - Spanish Accounting Review, Elsevier, vol. 19(1), pages 89-101.
    11. Ashraf, Dawood & Rizwan, Muhammad Suhail & Azmat, Saad, 2021. "Not one but three decisions in sukuk issuance: Understanding the role of ownership and governance," Pacific-Basin Finance Journal, Elsevier, vol. 69(C).

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