The Real Effects of Going Concern Information on Investment Decisions

This study examines the impact of going-concern (GC) information disclosure on firms' investment efficiency, focusing on Japan's revised disclosure system introduced in 2009. The reform establishes a two stage framework that requires disclosure in the Management Discussion and Analysis (MD&A) when events or conditions are identified that raise significant doubt about the GC assumption. If management's plans are expected to mitigate these concerns, disclosure is limited to the MD&A; however, if material uncertainty remains, more extensive disclosure is required in the financial statement footnotes and audit reports. Using a sample of financially distressed Japanese firms from 2010 to 2020, we document evidence of underinvestment among firms that disclose GC information compared to distressed firms that do not disclose such information. Similar results are observed even when GC information is separated into two stages of disclosure. The results remain robust to the use of entropy balancing and propensity score matching. Further analysis indicates that strong relationships with banks and high-quality audits mitigate underinvestment. Overall, our findings demonstrate the real effects of mandated GC information disclosure and highlight the role of institutional mechanisms in shaping investment behavior.