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 auditing standards introduced in 2009. The standards establish a two-stage framework that requires disclosure in the Management Discussion and Analysis (MD&A) when events or conditions 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 2019, we document underinvestment among firms that disclose GC information relative to distressed firms that do not. This result holds when we distinguish between the two stages of disclosure. The findings remain robust to the use of inverse probability weighting and entropy balancing. Additional analysis indicates that strong bank relationships mitigate underinvestment. Overall, the results demonstrate the real effects of mandated GC information disclosure and highlight the role of institutional mechanisms in shaping investment behavior.