EQUITY VALUE AND CHANGES IN THE PROBABILITY OF BANKRUPTCY DUE TO 'GOING-CONCERN' AUDIT OPINIONS

The going-concern audit opinion, since its inception, has been an issue of considerable debate, stimulating substantial research on the information value of the opinion. Early capital market studies find inconclusive results. Only recently, few studies provide evidence that certain going-concern opinion (unexpected going-concern opinion) has effect on equity value. These studies, however, do not address economic links between security valuation and the going-concern opinion.; I assess the information value of the going-concern opinion by investigating the association of its predictive ability for bankruptcy with capital market reaction for sample firms that experience changes of the audit opinion from unqualified (going-concern) to going-concern (unqualified) opinion from 1989 through 1993. Tests are conducted over two return intervals. First, to establish the potential value of the going-concern opinion, I examine security return over the period from the beginning of the audit year through the disclosure of the audit opinion in the sample year. Second, to evaluate the communication value of the going-concern opinion, I assess security return over the period surrounding the filing date of the financial statements with the Securities and Exchange Commission.; Results of the long window tests document a negative association between abnormal security return and unexpected change in the probability of bankruptcy due to the going-concern opinion, indicating that economic conditions culminating in the going-concern opinion are relevant to investors for their assessment of the probability of bankruptcy. Over the period surrounding the SEC disclosure of the financial statements, results provide that investors use the going-concern opinion for pricing securities in relation with assessment of the company's continued existence. These findings are especially relevant for those opinions that are inconsistent with previous information.; Findings of this study provide economic links of the information content of the going-concern opinion for assessing equity value. Also, in light of prior research on the usefulness of the going-concern opinion, findings provide further evidence that the going-concern opinion communicates useful information to investors for security pricing decisions. To policy makers, findings provide potentially useful information as they evaluate evidence indicating the usefulness of the going-concern opinion.