The market's response to earnings surprises after first-time going-concern modifications

Bei Dong, Dahlia Robinson and Michael Robinson

Advances in accounting, 2015, vol. 31, issue 1, 21-32

Abstract: This study investigates the market's response to earnings surprises after first-time going-concern modifications (GCMs). Using a sample of 581 firms and an events-study research design, we document a significant decrease in earnings response coefficients (ERCs) in the quarters following the GCM. However, this result appears to be driven by firms for which the GCM is unexpected. Specifically, we find that firms with high Z-scores prior to the GCM experience an immediate and prolonged decline in ERCs over the four quarters after the GCM, but find no change in ERCs for those firms with low Z-scores. These results are consistent with the GCM potentially resolving investors' fundamental uncertainty about future cash flows, and/or signaling that the earnings numbers generated by the firm are noisier or less persistent than was previously assumed. Further, we find no change in ERCs for a propensity-score matched control sample that did not receive GCMs, suggesting that the decline in earnings informativeness is not a response to general economic conditions. Finally, we document that institutional investors incorporate the information in the GCM. The study makes an important contribution to the going-concern literature by documenting that GCMs influence the pricing of earnings.

Keywords: Going-concern modifications; Earnings response coefficients; Informativeness of earnings; Institutional investors (search for similar items in EconPapers)
JEL-codes: G14 M4 M41 M42 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:advacc:v:31:y:2015:i:1:p:21-32

DOI: 10.1016/j.adiac.2015.03.001

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