The Going-Concern Market Anomaly Revisited

Kauser, Taffler and Tan (2009) document a going-concern market anomaly in the U.S., resulting in a sizable downward drift over the subsequent one-year period for first-time going-concern recipients. The authors argue that adverse signals regarding viability are not being impounded appropriately by the market. We argue that the documented drift is a result of failing to control for financial statement information risk identifiable to the market, and likely used by the auditor in reaching a going-concern decision. We replicate Kauser et al.'s results in the 2000-2012 time period and document a sizable abnormal drift using their original matching procedure based on market measures. However, upon matching on firm-level financial characteristics which have been used as the matching criteria in nearly all prior going-concern research, the mean drift disappears in all event windows. We further show that the originally documented drift is concentrated in extremely small firms with relatively lower financial distress and firms with low institutional ownership