Do investors perceive the going‐concern opinion as useful for pricing stocks?

Abstract

Purpose The purpose of this paper is to conduct an experiment to examine whether investors view the going‐concern opinion as providing information that is useful in valuing companies' stocks. Prior research on this issue using archival data has produced mixed results. Design/methodology/approach An experiment is conducted with financial analysts in which the auditor's opinion and the opinion of industry specialists (proxy for market expectations) are manipulated. Participants estimated the stock price of a fictional company both before and after the issuance of an auditor's opinion. Findings The results strongly support the hypothesis that investors perceive the going‐concern opinion as relevant for valuing a company's common stock. Furthermore, the participants viewed the going‐concern opinion as relevant even when the report confirmed prior market expectations. Practical implications Using a controlled setting, the paper finds that investors believe that the auditor's going‐concern opinion contains useful information. This suggests that auditors' judgment regarding client viability is valued by investors. Auditing standards that require an assessment of client viability should remain in place. Originality/value This is the first study that uses an experimental approach to examine whether investors view the auditor's going‐concern opinion as relevant to pricing stocks. The use of an experiment is intended to overcome methodological limitations inherent in studies that use archival data.