The value relevance of expected vs. unexpected going concern opinions

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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.

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    • 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