Stock market reaction to auditor opinions – Italian evidence

Abstract

Purpose– The purpose of this paper is to examine investor reactions to auditor opinions containing qualifications or an emphasis of matter paragraph related to going concern uncertainty or financial distress. In particular, abnormal returns are analyzed around audit report dates.Design/methodology/approach– The event study methodology, focusing on a short event window, was used to determine whether there is an immediate market reaction to the audit report announcement, as might be expected assuming efficient stock markets.Findings– Overall, this analysis shows that the audit reports investigated have information content for investment decisions. In particular, the qualifications expressed in the audit report have a negative effect on stock prices. It is also shown that an unqualified opinion with an emphasis of matter paragraph regarding going concern uncertainty or financial distress has a positive effect on stock prices. These results also elucidate the distinction between different types of opinions in the Italian context.Research limitations/implications– This paper has attempted to limit the possible concurrent effects on stock prices using a short window event study methodology. However, the possibility that some other event may have occurred during this event window cannot be excluded. Among the policy implications coming from this research, it is argued that the authorities should regulate the public disclosure of audit reports, so that the information becomes available to the audited company and the other stakeholders on the same day, which, in theory, would be the day that the audit process concludes with the signing of the audit report.Originality/value– The findings of this paper show the relevance of audit reports, distinguishing the different impacts based on the types of audit opinions issued in a specific jurisdiction (qualified and unqualified with an emphasis of matter paragraph).