The Asymmetric Information Content of Going-Concern Opinion Opinions - Evidence from Bankrupt Firms With and Without Prior Distress Indicators

Abstract

The purpose of this paper is to examine whether modified opinions issued for reasons of going-concern uncertainties ('going-concern opinion') mitigate the bankruptcy announcement surprise for firms that did not previously exhibit obvious public signs of financial trouble. Extant studies demonstrate that publicly available negative information that acts as a signal of financial trouble mitigates the negative announcement effect of subsequent bankruptcy filing. However, these studies also reveal that a non-trivial number of these firms do not exhibit obvious signs of financial trouble prior to the filing (eg. as exhibited by the firm being in default, its accounting ratios, or the auditor's going-concern opinion). These studies do not examine the relative information content of the going-concern opinion for firms that show obvious signs of distress and those that do not. This study hypothesizes and shows that the going-concern opinion issued by auditors mitigates the bankruptcy filing surprise for firms whose conventional public signals of financial distress are absent. The results show that going-concern opinions significantly mitigate the bankruptcy filing surprise only for firms whose financial ratios do not indicate obvious distress. To some degree, the results suggest that the informational content of the going-concern opinion is not homogenous across all states of the firm prior to bankruptcy filing. Given current public scrutiny of the audit profession in the light of recent high-profiled, alleged audit failures (eg. Enron), the findings of this study provide useful evidence in defense of the value-added of the audit function to society at large.