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Do analysts know but not say? The case of goingconcern opinions


  • Rúben Peixinho

    () (University of Algarve and CEFAGE-UE, Portugal)

  • Richard Taffler


This study explores whether security analysts recognize firms’ going-concern problems and report appropriately to investors. We find that analysts signal their anticipation of the publication of a going-concern modified (GCM) audit report in two ways: 1) they downgrade more aggressively stock recommendations of GCM firms than stock recommendations of control firms as the event date approaches; 2) they are more likely to cease coverage of a GCM firm than a control firm over the one-year period prior to the GCM date. We further show that analysts react to the publication of an actual GCM audit report by stopping coverage of such firms immediately subsequent to the event disclosure. Our results suggest that analysts know that the future viability of GCM firms is jeopardized but do not say it clearly to retail investors, who constitute the main clientele of these firms. Consistent with the SEC concerns about analyst recommendations, we conclude that investors cannot rely solely on analyst recommendations since they are reluctant to report negatively (i.e, “underperform” or “sell”) even in this extreme bad news domain. We further conclude that analyst relative pessimism and coverage cessation is likely to be associated with negative expectations about firms’ future prospects.

Suggested Citation

  • Rúben Peixinho & Richard Taffler, 2011. "Do analysts know but not say? The case of goingconcern opinions," CEFAGE-UE Working Papers 2011_09, University of Evora, CEFAGE-UE (Portugal).
  • Handle: RePEc:cfe:wpcefa:2011_09

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    Analyst behaviour; stock recommendations; bad news announcements; goingconcern reports.;

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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