Investor Reaction to Auditors' Going Concern Emphasis of Matter: Evidence from a Natural Experiment

Jean Bedard*, Carl Brousseau, Ann Vanstraelen

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

3 Citations (Web of Science)

Abstract

Using a "natural experiment'''' provided by a change in Canadian auditing standards requiring an emphasis of matter paragraph in the auditor''s report (GC-EOM) when the financial statements include a going concern uncertainty disclosure (GC-FS), this paper examines the incremental investor reaction to the auditor''s report over the related GC-FS. Conditioning on the linguistic severity of the GC-FS (weak and severe), we first document a negative price response to severe but not to weak GC-FS before the regulatory change. This implies that investors react to financial statement disclosures and account for their degree of interpretability in the absence of a GC-EOM. When the uncertainty disclosure is accompanied by a GC-EOM, we find incremental negative abnormal returns and lower abnormal trading volume only for weak GC-FS. Collectively, these findings imply that an emphasis of matter paragraph in the auditor''s report can have incremental value to investors.
Original languageEnglish
Pages (from-to)27-55
Number of pages29
JournalAuditing-a Journal of Practice & Theory
Volume38
Issue number2
DOIs
Publication statusPublished - May 2019

Keywords

  • going concern
  • auditor's report
  • emphasis of matter paragraph
  • perceived financial reporting quality
  • ANNUAL EARNINGS ANNOUNCEMENTS
  • GOING-CONCERN OPINIONS
  • TRADING VOLUME
  • INFORMATION-CONTENT
  • DISCLOSURE
  • UNCERTAINTY
  • FEES
  • INDEPENDENCE
  • VALUATION
  • RETURNS

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