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Prior research on market reaction to going-concern modifications indicates that unanticipated modifications cause a negative market reaction, whereas anticipated modifications produce no similar reaction. This paper uses previously proposed measures of market expectations and a naive model—actual subsequent viability status—to assess market reaction to going-concern report recipients. Our results indicate that a naive measure of market expectations provides information to the market that is incremental to previously developed measures when using market reaction as an indication of changed expectations. Multiple regression analyses controlling for firm size, going-concern expectation, bankruptcy probability, changes in financial condition, default status, and delisting support our finding of differential abnormal returns based on subsequent viability, and indicate a need for improved models of market expectations.
Blay et al. (Sun,) studied this question.