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Perceived auditor quality and the earnings response coefficient

Article Abstract:

The issue of whether some auditors possess greater quality than others, or if they can create earnings reports with higher credibility for investors, is investigated. This point in question is tested along with the modified Holthausen-Verrecchia (H-V) model, which states that earnings reports that are greeted with less surprise have a higher earnings response coefficient (ERC). For this study, the difference in the ERCs of Big Eight (B8) and non-Big Eight (NB8) audited client firms is used as a measure of whether auditor size is equivalent to auditor credibility, and of the verity of the altered H-V model. Results show that the ERCs of the B8 clients are statistically greater than those of the NB8 clients. The outcome is arrived at either through the matching of sample firms coupled according to industry membership, or a switch sample of firms classified according to shifts to and from B8 and NB8 auditors.

Evaluation, Auditors

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Going concern opinions and the market's reaction to bankruptcy filings

Article Abstract:

The relationship between going concern opinions and the market's reaction to bankruptcy filings was examined. Data were drawn from a sample of 98 bankrupt firms from the 1980-1988 period. Results showed that firms that received going concern opinions had less negative excess returns in the period around the filing of bankruptcy than those that received unqualified opinions. These results were found even after controlling for the probability of bankruptcy, the market's reaction to news announcements made before bankruptcy and changes in stock price before the auditor's report is submitted. This finding is consistent with those of earlier studies, which found going concern opinions to be indicative of bankruptcy and bankruptcy resolution.

Research, Bankruptcy, Going concern (Accounting), Going concern

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