Legal Regimes and Investor Response to the Auditor’s Going-Concern Opinion

This article examines how legal regime may affect the market’s reaction to the auditor’s going-concern (GC) opinion. We hypothesize that, ceteris paribus, investors in a creditor-friendly bankruptcy regime (the United Kingdom) will react more adversely to a first-time GC opinion indicating increased...

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Bibliographic Details
Published in:Journal of accounting, auditing & finance auditing & finance, 2017-01, Vol.32 (1), p.40-72
Main Authors: Kausar, Asad, Taffler, Richard J., Tan, Christine E. L.
Format: Article
Language:English
Subjects:
Auditing standards
Auditors opinions
Bankruptcy
Going concern assumption
International comparisons
Studies
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Summary:This article examines how legal regime may affect the market’s reaction to the auditor’s going-concern (GC) opinion. We hypothesize that, ceteris paribus, investors in a creditor-friendly bankruptcy regime (the United Kingdom) will react more adversely to a first-time GC opinion indicating increased risk of loss associated with bankruptcy than do investors in a debtor-friendly bankruptcy regime (the United States). Our empirical results are consistent with this expectation. These findings are strengthened by additional analysis of the impact of the recent convergence in bankruptcy regime between the United States and United Kingdom on the market reaction to GC opinions in the United States. Our findings demonstrate a specific situation where the auditing standards and institutional factors interact, with their joint impact affecting the market’s reaction to the GC opinion.
ISSN:0148-558X
2160-4061
DOI:10.1177/0148558X15602390