Independent Auditor's Opinions of Substantial Doubt: A Sox-2002 Markets Efficiency Evaluation

Abstract

This study determined that cumulative abnormal stock returns of an auditor portfolio of firms with substantial doubt were positive but non-significant for a 23-event week period following the release of independent auditor opinions but transitioned to positive and significant for the remainder of the 35-event week window. The non-significant period supports the semi-strong form of the efficient markets hypothesis (EMH), which suggests that these opinions were quickly and efficiently absorbed by the firms' market value. The significant period anomaly violates the EMH and may suggest a lagged market response to an optimistic outlook of the market value of the auditor portfolio. This may also suggest a lagged positive market effect suggestive of future economic recovery. The impact for the practitioner is that, on average, when these firms are classified as having substantial doubt, their market values are more likely to recover, allowing them to remain as going concerns in the long run. The exception is a firm filing for bankruptcy during the event window.