Going Concern Notes, Downsizing, and Exit

Sumio Saruyama and Peng Xu

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: This paper investigates the effect of an accounting standard adopted in March of 2003 that requires management to disclose substantial doubt on the company's ability to continue in a note regarding going concern (GCN) in financial statements. The new requirement provides instructions based on international practice. Consistently, we find that Japanese firms with a GCN are less profitable, more highly leveraged, and smaller than firms without such a GCN, which is quite similar to U.S. firms with a going-concern modified audit opinion. Also, firms that have reached a critical point concerning layoffs, dividend payout regulations, or delisting criteria are more likely to disclose going concern uncertainties. Probably this is aimed to provide information for controlling conflicts of interests among stakeholders. In predicting whether a firm will file for bankruptcy, management's disclosures about going concern status provide statistically and economically significant explanatory power. In terms of the results of the solutions proposed to mitigate disclosed adverse conditions and circumstances, firms with GCNs in their financial statements undertake more aggressive measures in assets, borrowings, and workforce, compared to restructuring efforts of non-GCN firms at critical points of distress. Surviving firms with a GCN tend to experience extended periods of low profitability, although asset turnover improves. Our results are robust in treatment-effect estimators compared with counterfactual outcomes.

Pages: 47 pages
Date: 2019-01
New Economics Papers: this item is included in nep-acc
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Persistent link: https://EconPapers.repec.org/RePEc:eti:dpaper:19001

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