The horse has bolted: revisiting the market reaction to going concern modifications of audit reports

Kathleen Herbohn, Vanitha Ragunathan and Robert Garsden

Accounting and Finance, 2007, vol. 47, issue 3, pages 473-493

Abstract: This paper examines what value is added by an audit report through an investigation of the information content for first-time going concern modifications (GCMs). Consistent with prior research, we find no evidence of a short-term market reaction to the public announcement of a first-time GCM. We document a significant adverse medium-term market reaction in the 12 months prior to a first-time GCM announcement, but find no evidence of a persistent market underreaction in the 12 months following the announcement. These results are consistent with an audit opinion fulfilling an attestation function and confirming the deteriorating financial condition of a firm. Copyright (c) The Authors
Journal compilation (c) 2007 AFAANZ.

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