Information Asymmetries and Investor Reactions to Going Concern Audit Reports

Abstract

The purpose of this paper is to examine whether and how the stock market reaction to auditors’ going concern reports is affected by information asymmetries. The paper uses a sample of 193 first time going concern audit reports issued for Russell 3000 firms between 2002 and 2008. Market-model abnormal returns around two event dates, the 10-K date and the audit report date, are used to measure the investor reactions to going concern reports. The hypotheses of the paper are investigated using an OLS regression. The results indicate that firm size and leverage mitigate the negative returns to the going concern information around the audit report date. As hypothesized, firm attributes that affect monitoring and reporting have a significant impact on the relevance and/or predictability of audit reports. For firms with larger information asymmetries the release of the audit report may be the first time investors receive information about going concern problems. Second, the results suggest that the audit report date provides a cleaner measure of the reaction to the going concern audit report than the date of the 10-K.