Is there any effect of going concern audit opinion public announcements on the stock price behavior in a short term period? Empirical evidence from Australia Authors: Mariya Novoselova Nhar Soklim Supervisor: Tobias Svanström Student Umeå School of Business Spring semester 2011 Master thesis, two-year, 30 hp Acknowledgements We would like to take the occasion to express a profound gratitude to our supervisor Tobias Svanström for the valuable advice, constructive criticism and overwhelming helpfulness. It was a great pleasure to discuss our research problem with him and gain new insights while conducting the study. Therefore, we are deeply indebted to Tobias for his dedication and willingness to share the professional knowledge with us. Furthermore, we are grateful to the persons from the Department of Statistics, more specifically Mojgan Padyab and Anders Lundquist, who helped us with a piece of advice on the event study statistic methods. Also we acknowledge the contribution to our academic and personal development on the part of the USBE professors from the previous courses. With all my heart I, Mariya Novoselova, wish to thank Umeå University, in particular, and Sweden, as a country in general, which have provided me with the unique opportunity and challenge to study here. Also it worth mentioning how thankful I am to my home country Russia and professors from Perm State University, who created a fundament for my “grain” of knowledge. I have no words to express the gratitude and love to my family, the parents Ludmila Novoselova and Nickolai Novoselov, and brother Maxim Novoselov, since their encouragement and inevitable support made this rewarding experience possible. Also I wish to thank all my friends for day-to-day care and faith in me. At last but not the least, I, Nhar Soklim, would like to gratitude my parents, brothers and sisters, and friends who always support and encourage me to make this research possible indirectly so that I can accomplish it without any obstacle. Finally, it remains to acknowledge all readers of the research paper for the expressed interest and critical thinking. Mariya Novoselova and Nhar Soklim Abstract The research paper explores the value of information content incorporated in the first-time going concern opinion from the perspective of investors. The signaling effects of the auditors’ opinion with going concern remark issued to financially distressed companies are of a great value in case the auditor statements deliver new information content which has not been incorporated in the previously disclosed financial information. Otherwise a going concern audit opinion remains not relevant for the purpose of investors’ decision making. If the going concern audit opinion adds new information content, we gain an ability to detect a stock market reaction to the relevant public announcement. The paper examines the Australian stock market reaction to public announcements of going concern audit opinion in a short term period for the sample of the 29 first-time going concern listed companies during the 2007 to 2009 years observation period. High sample criteria are determined in order to avoid contamination effects of other price sensitive information. The impact of both the preliminary financial report and the final annual report is examined by means of the parametric and non-parametric tests aligned with the event study methodology. Consistent with previous studies in Australia, no significant financial market reaction to the final going concern audit opinion announcements inherent to the Australian environment has been found. We document that the more negative impact on the market reaction is caused by the preliminary financial report rather than the final report, which contains an audit opinion note. Correspondently, the audit opinions with going concern qualification do not add new information content for the Australian stock market participants, who base their expectations on the previously disclosed financial information. Key words: Going-concern audit opinion, investor reaction, abnormal returns, even study analysis. Table of Contents CHAPTER 1: INTRODUCTION ..................................................................................... 1 1.1 BACKGROUND ........................................................................................................... 1 1.2 RESEARCH QUESTION ................................................................................................ 4 1.3 RESEARCH PURPOSE .................................................................................................. 4 1.4 LIMITATIONS ............................................................................................................. 5 1.5 DISPOSITION ............................................................................................................. 7 1.6 DEFINITION OF THE KEY WORDS ................................................................................ 8 CHAPTER 2: THEORETICAL METHOD ..................................................................... 9 2.1 INTRODUCTION ......................................................................................................... 9 2.2 THE CHOICE OF THE SUBJECT .................................................................................... 9 2.3 PRECONCEPTIONS ..................................................................................................... 9 2.4 RESEARCH PHILOSOPHY .......................................................................................... 10 2.5 RESEARCH APPROACH ............................................................................................. 11 2.5.1 Epistemological assumption ............................................................................... 11 2.5.2 Ontological assumption...................................................................................... 12 2.6 RESEARCH STRATEGIES ........................................................................................... 12 2.7 RESEARCH DESIGN .................................................................................................. 14 2.8 LITERATURE SEARCH .............................................................................................. 14 CHAPTER 3: THEORETICAL FRAMEWORK ........................................................... 16 3.1 INTRODUCTION ....................................................................................................... 16 3.2 GOING CONCERN ISSUES ON AUDIT REPORTING ....................................................... 16 3.2.1 Going concern assumption ................................................................................. 16 3.2.2 Types of audit opinion modifications ................................................................. 19 3.3 INFORMATION CONTENT OF GOING -CONCERN AUDIT OPINION AND MARKET REACTION .......................................................................................................................... 21 3.4 HYPOTHESIS DEVELOPMENT ................................................................................... 25 CHAPTER 4: PRACTICAL METHOD .......................................................................... 27 4.1 INTRODUCTION ....................................................................................................... 27 4.2 DATA COLLECTION ................................................................................................. 27 4.2.1 Primary source of data ....................................................................................... 27 4.2.2 Secondary source of data ................................................................................... 28 4.2.3 Criticism of primary and secondary source data ............................................... 30 4.3 DETERMINATION OF THE SAMPLE SELECTION .......................................................... 31 4.4 EVENT STUDY ANALYSIS METHOD .......................................................................... 33 4.4.1 Event definition .................................................................................................... 36 4.4.2 Estimation, event and post-event window periods ............................................... 36 4.4.3 Actual returns ....................................................................................................... 37 4.4.4 Normal returns ..................................................................................................... 38 4.4.5 Abnormal returns ................................................................................................. 40 4.4.6 Significance tests of abnormal returns ................................................................. 42 4.4.7 Event study assumptions....................................................................................... 43 CHAPTER 5: EMPIRICAL EVIDENCE AND ANALYSIS ......................................... 45 5.1 DESCRIPTIVE STATISTICS OF THE SAMPLE ............................................................... 45 5.2 APPLIED EVENT STUDY ANALYSIS ........................................................................... 51 5.2.1 Actual returns ..................................................................................................... 51 5.2.2 Normal returns ................................................................................................... 51 5.2.3 Abnormal returns ............................................................................................... 54 5.3 FINDINGS