The value relevance of expected vs. unexpected going concern opinions
-
Author(s)Emiliano Ruiz-BarbadilloLink to ORCID Index: https://orcid.org/0000-0001-7618-4131
,
Andrés GuiralLink to ORCID Index: https://orcid.org/0000-0002-3290-5133
-
DOIhttp://dx.doi.org/10.21511/imfi.16(2).2019.05
-
Article InfoVolume 16 2019, Issue #2, pp. 47-65
- Cited by
- 1343 Views
-
147 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
Previous event studies find that going concern opinions (GCOs) convey significant information to the market when the audit reports appear to be unexpected. Using the value relevance method, this paper examines the differential impact of expected and unexpected going concern opinions on the market value of US firms for the 2000–2006 time period. The results suggest that while both firms receiving expected and unexpected GCOs suffer a drop in their average market value, the decrease is larger in the case of firms with unexpected GCOs. It is also observed that the market tends to shift the weight they place on earnings to the book value of equity in valuing firms with unexpected GCOs. Specifically, the decrease in the pricing multiple of earnings is larger for the case of unexpected GCOs. This result suggests that GCOs are more informative when they are unexpected. The study complements existing work by exploring whether expected GCOs have any differential valuation impact than unexpected GCOs instead of looking at the informativeness of GCOs alone.
- Keywords
-
JEL Classification (Paper profile tab)M41, G32, G33
-
References46
-
Tables6
-
Figures0
-
- Table 1. Sample distribution
- Table 2. Comparison of characteristics of financially distressed firms with non-distressed firms
- Table 3. Correlation matrix
- Table 4. Contingency table of financial distress vs. going concern opinion for all firms
- Table 5. Comparison of expected vs. unexpected GCOs firms – using Zmijewski score as a proxy
- Table 6. Comparison of expected vs. unexpected GCOs firms – using first-time GCOs as a proxy
-
- Altman, E. (1982). Accounting implications of failure prediction models. Journal of Accounting, Auditing and Finance, 2, 4-19.
- American Institute of Certified Public Accountants (AICPA). (1988). The auditor’s consideration of an entity’s ability to continue as a going concern. Statement on Auditing Standards, 59. New York: AICPA.
- Ashton, D., Cooke, T., & Tippett, M. (2003). An aggregation theorem for the valuation of equity under linear information dynamics. Journal of Business Finance and Accounting, 30, 413-440.
- Ball, R., Walker, R., & Whittred, G. (1979). Audit qualifications and share prices. Abacus, 15, 23-34.
- Barth, M., Beaver, W., Hand, J., & Landsman, W. (1999). Accruals, cash flows, and equity values. Review of Accounting Studies, 3, 205-229.
- Barth, M., Beaver, W., & Landsman, W. (1998). Relative valuation roles of equity book and net income as a function of financial health. Journal of Accounting and Economics, 25, 1-34.
- Basu, S. (1997). The conservatism principle and the asymmetric timeliness of earnings. Journal of Accounting and Economics, 4, 3-37.
- Behn, B., Kaplan, S., & Krumwiede, K. (2001). Further evidence on the auditor’s going-concern report: The influence of management plans. Auditing: A Journal of Practice & Theory, 20(1), 13-28.
- Berger, P., Ofek, E., & Swary, I. (1996). Investor valuation of the abandonment option. Journal of Financial, 42, 257-287.
- Blay, A. D., & Geiger, M. A. (2001). Market Expectations for First-Time Going-Concern Recipients. Journal of Accounting, Auditing & Finance, 16, 209-226.
- Blay, A., Geiger, M. A., & Norton, D. S. (2011). The Auditor’s Going-Concern Opinion as a Communication of Risk. Auditing: A Journal of Practice & Theory, 30(2), 77-102.
- Burgstahler, D. C., & Dichev, I. D. (1997). Earnings, adaptation and equity value. The Accounting Review, 72, 187-215.
- Carcello, J. V., Hermanson, D. R., & Neal, T. (2003). Auditor reporting behavior when GASS lack specificity: the case of case of SAS (nº59). Journal of Accounting and Public Policy, 22, 63-81.
- Carcello, J. V., & Neal, T. (2000). Audit committee composition and auditor reporting. The Accounting Review, 75, 453-467.
- Carlson, S. J., Glezen, G. W., & Benefield, M. E. (1998). An investigation of investor reaction to the information content of a going concern audit report while controlling for concurrent financial statement disclosures. Quarterly Journal of Business and Economics, 37(3), 25-39.
- Casterella, J. R, Lewis, B. L., & Walker, P. L. (2000). Modeling the audit opinions issued to bankrupt companies: A two-stage empirical analysis. Decision Sciences, 31, 507-530.
- Chow, C., & Rice, S. (1982). Ualified Audit Opinions and Auditor Switching. The Accounting Review, 57(2), 326-335.
- Citron, D. B., & Taffler, R. J. (2001). Ethical behavior in the U.K. audit profession: The case of the self-fulfilling prophecy under going-concern uncertainties. Journal of Business Ethics, 29, 353-363.
- Collins, D., Maydew, E., & Weiss, I. (1997). Changes in the value-relevance of earnings and book values over the past forty years. Journal of Accounting and Economics, 24, 39-67.
- Craswell, A. (1985). Studies of the information content of qualified audit reports. Journal of Business Finance & Accounting, 12, 93-115.
- Davis, E., & Ashton, R. (2002). Threshold adjustment in response to asymmetric loss functions: The case of auditors’ “substantial doubt” thresholds. Organizational Behavior and Human Decision Processes, 89, 1082-1099.
- Dodd, P., Dopuch, N., Holthausen, R., & Leftwich, R. (1984). Qualified audit opinions and stock prices, information content, announcement dates, and concurrent disclosures. Journal of Accounting and Economics, 6, 3-38.
- Elliott, J., & Hanna, J. (1996). Repeated accounting write-offs and the information content of earnings. Journal of Accounting Research, 34, 135-155.
- Fleak, S., & Wilson, E. (1994). The incremental information content of the going concern audit opinion. Journal of Accounting, Auditing and Finance, 9, 149-166.
- Geiger, M. A., & Raghunandan, K. (2002). Going-concern opinions in the “new” legal environment. Accounting Horizons, 16, 17-26.
- Hayn, C. (1995). The information content of losses. Journal of Accounting and Economics, 20, 125-153.
- Holthausen, R., & Watts, L. (2001). The relevance of the value-relevant literature for financial accounting standard setting. Journal of Accounting and Economics, 31, 3-75.
- Hopwood, W., McKeown, J., & Mutchler, J. (1989). A test of the incremental explanatory power of opinions qualified for consistency and uncertainty. The Accounting Review, 64, 28-48.
- Hopwood, W., McKeown, J., & Mutchler, J. (1994). A re-examination of auditor versus model accuracy within the context of the going concern opinion decision. Contemporary Accounting Research, 11, 295-310.
- Jones, F. (1996). The information content of the auditor’s going concern evaluation. Journal of Accounting and Public Policy, 15, 1-27.
- Kida, T. (1980). An investigation into auditors’ continuity and related qualification judgments. Journal of Accounting Research, 18, 506-523.
- Koh, H. C. (1991). Model predictions and auditor assessments of going concern status. Accounting and Business Research, 21(84), 331-338.
- Koh, H. C., & Killough, L. (1990). The use of multiple discriminant analysis in the assessment of the going-concern status of an audit client. Journal of Business, Finance and Accounting, 17, 179-192.
- Loudder, M., Khurana, I., Sawyers, R., Cordery, C., Johnson, C., Lowe, J., & Wunderle, R. (1992). The information content of audit qualifications. Auditing: A Journal of Practice and Theory, 11(1), 69-82.
- Louwers, T. J. (1998). The relation between going-concern opinions and the auditor’s loss function. Journal of Accounting Research, 36, 143-156.
- Menon, K., & Schwartz, K. (1987). An empirical investigation of audit qualifications decisions in the presence of going concern uncertainties. Contemporary Accounting Research, 3, 302-315.
- Mutchler, J. (1985). A multivariate analysis of the auditor’s going-concern opinion decision. Journal of Accounting Research, 23, 668-682.
- Mutchler, J., Hopwood, W., & McKeown, J. (1997). The influence of contrary information and mitigating factors on audit opinions decisions on bankrupt companies. Journal of Accounting Research, 35, 295-310.
- Nogler, G. E. (1995). The resolution of auditor going concern opinions. Auditing: A Journal of Practice & Theory, 14(2), 681-689.
- Ohlson, J. (1995). Earnings, book values and dividends in equity valuation. Contemporary Accounting Research, 11, 661-687.
- O’Reilly, D. M. (2010). Do investors perceive the going-concern opinion as useful for pricing stocks? Managerial Auditing Journal, 25(1), 4-16.
- Petersen, M. A. (2009). Estimating standard errors in finance panel data sets: Comparing Approaches. Review of Financial Studies, 22, 435-480.
- Ruiz-Barbadillo, E., Gómez-Aguilar, N., & Carrera, N. (2009). Does mandatory audit firm rotation enhance auditor independence? Evidence from Spain. Auditing: A Journal of Practice & Theory, 28(1), 113-135.
- Subramanyam, K. R., & Wild, J. J. (1996). Going-Concern Status, Earnings Persistence, and Informativeness of Earnings. Contemporary Accounting Research, 13, 251-273.
- Tan, C. E. (2004). Alternative adaptations of distressed firms’ resources: The valuation roles of book value of equity and earnings (Working Paper).
- Zmijewski, M. E. (1984). Methodological issues related to the estimation of financial distress prediction models. Journal of Accounting Research, 22(Suppl.), 59-82.
-
The effect of IFRS adoption on the value relevance of accounting information: evidence from South Korea
Investment Management and Financial Innovations Volume 16, 2019 Issue #2 pp. 78-88 Views: 1869 Downloads: 302 TO CITE АНОТАЦІЯThis study investigates whether the value relevance of accounting information was changed after IFRS adoption in South Korea. Related prior studies have found mixed empirical evidence depending on research methodologies or research periods. Moreover, the effect of IFRS adoption on value relevance can be different between Korean stock markets (KSE and KOSDAQ) because they have different characteristics. Also, the main financial statements reported by Korean firms had changed from individual financial statements to consolidated financial statements after IFRS adoption. Thus, this study analyzes the effect of IFRS adoption on the value relevance of individual and consolidated accounting numbers expanding research periods (5 years before and after IFRS adoption) and comparing changes in explanatory powers of Ohlson (1995) model on each listing market. The empirical results indicate that the value relevance of Korean listed firms generally decreased after IFRS adoption. However, the value relevance of KSE listed firms decreased, while the value relevance of KOSDAQ listed firms increased after IFRS adoption. In addition, it was found that the effects of IFRS adoption on value relevance of individual and consolidated financial information were different depending on listed markets. This implies that different level of demand for information environment may induce differential effects of IFRS adoption on value relevance.
-
The role of moderating audit quality relationship between corporate characteristics and financial distress in the Indonesian mining sector
Perdana Wahyu Santosa ,
Martua Eliakim Tambunan ,
Eva Rohima Kumullah
doi: http://dx.doi.org/10.21511/imfi.17(2).2020.08
Investment Management and Financial Innovations Volume 17, 2020 Issue #2 pp. 88-100 Views: 1680 Downloads: 531 TO CITE АНОТАЦІЯFinancial performance and corporate governance play an important role in financial distress in the mining sector, which is one of the most significant contributors to the Indonesian economy. This study aims to analyze the effect of corporate characteristics on financial distress (FD), which is moderated by corporate governance (audit quality), and uses the controlling variables (inflation rate and GDP). The study uses data from audited financial statements from mining sector in the Indonesia Stock Exchange for the period 2013–2018. Since the dependent variable (FD) is dichotomous, this study used a binary logistic regression model, as it is the case in many studies regarding the probability of bankruptcy filing. In line with the current study and some previous studies, leverage, efficiency (activity), market-to-book value, audit quality, and GDP affect the probability of financial distress significantly. Only liquidity and inflation do not impact FD. Besides, the moderating audit quality weakens the effect of liquidity and PBV; otherwise, it strengthens leverage and efficiency in predicting financial distress. As for managerial implications, this study concludes that corporate performance, corporate governance, and macro-risk factors affect the probability of financial distress. The authors suggest that mining firms need to pay attention to corporate governance and should watch the economic condition for business sustainability.
-
Impact of relative and absolute financial risks on share prices: a Zimbabwe Stock Exchange perspective
Atanas Sixpence ,
Olufemi P. Adeyeye ,
Rajendra Rajaram
doi: http://dx.doi.org/10.21511/imfi.17(1).2020.01
Investment Management and Financial Innovations Volume 17, 2020 Issue #1 pp. 1-14 Views: 1589 Downloads: 174 TO CITE АНОТАЦІЯThe impact of financial risks on share prices concerns investors, company executives and accounting standards developers. Investors need this information in delineating their equity valuation models while company executives need the information to make appropriate capital structure decisions. Accounting standards developers use this information in their policy to make accounting standards contemporary.
The authors examine the link between relative and absolute financial risks and share prices using a dynamic panel of non-financial listed companies on the Zimbabwe Stock Exchange after dollarization. Equity investors incurred losses before dollarization, which prompted this investigation into the sphere of financial risks in order to explain share price movements so that investors can use it to minimize losses in the future. Absolute financial risk is measured by the total debt, while debt/equity ratio measures relative financial risk. Market capitalization as a proxy for equity and debt is measured by total liabilities. An average debt/equity ratio greater or equal to one qualifies a firm into the high-risk category while ratios below one imply low-risk firms. Results from two-step System Generalised Method of Moments (GMM) show negative and significant connection between relative risk and share prices across risk categories. The impact of absolute risk on share prices differs by risk category. Firm managers are advised to keep total liabilities below market capitalization in order to enjoy the benefits of low-risk categorization. Debt ratio is a reasonable indicator of value and investors can use it in equity valuation. Mandatory reporting of debt ratios should be considered by accounting standards developers.
