TY - JOUR
T1 - Do going concern opinions provide incremental information to predict corporate defaults?
AU - Gutierrez, Elizabeth
AU - Krupa, Jake
AU - Minutti-Meza, Miguel
AU - Vulcheva, Maria
N1 - Funding Information:
The authors are grateful for helpful comments from Peter Easton (editor), two anonymous reviewers, Pietro Bianchi, Khrystyna Bochkay, Lauren Cunningham, David Hay (discussant), Mark Maffett, Linda Myers, Dhananjay Nanda, Sundaresh Ramnath, Tyler Shumway (discussant), Eric Weisbrod, Michael Willenborg, Peter Wysocki, PCAOB staff, and seminar participants at the AAA Auditing Section Midyear Meeting 2016, University of Chicago, Florida Accounting Symposium 2016, University of Miami, University of Minnesota Empirical Accounting Research Conference 2016, Nanyang Technical University, National University of Singapore, PCAOB/JAR Conference on Auditing and Capital Markets 2017, and University of Toronto. The authors also thank Yamin Hao and Taylor Wiesen for their excellent research assistance. The authors thank the Risk Management Institute at the National University of Singapore for providing the CRI default data.
Publisher Copyright:
© 2020, Springer Science+Business Media, LLC, part of Springer Nature.
Copyright:
Copyright 2020 Elsevier B.V., All rights reserved.
PY - 2020/12/1
Y1 - 2020/12/1
N2 - Investors, regulators, and academics question the usefulness of going concern opinions (GCOs). We assess whether GCOs provide incremental information, relative to other predictors of corporate default. Our measure of incremental information is the additional predictive power that GCOs give to a default model. Using data from 1996 to 2015, initially we find no difference in predictive power between GCOs alone and a default model that includes financial ratios. However, there is an imperfect overlap between GCOs and other predictors. We show that GCOs increase the predictive power of several models that include ratios, market variables, probability of default estimates, and credit ratings. Using a model that includes ratios and market variables, GCOs increase the number of predicted defaults by 4.4%, without increasing Type II errors. Our findings suggest that GCOs summarize a complex set of conditions not captured by other predictors of default.
AB - Investors, regulators, and academics question the usefulness of going concern opinions (GCOs). We assess whether GCOs provide incremental information, relative to other predictors of corporate default. Our measure of incremental information is the additional predictive power that GCOs give to a default model. Using data from 1996 to 2015, initially we find no difference in predictive power between GCOs alone and a default model that includes financial ratios. However, there is an imperfect overlap between GCOs and other predictors. We show that GCOs increase the predictive power of several models that include ratios, market variables, probability of default estimates, and credit ratings. Using a model that includes ratios and market variables, GCOs increase the number of predicted defaults by 4.4%, without increasing Type II errors. Our findings suggest that GCOs summarize a complex set of conditions not captured by other predictors of default.
KW - Audit quality
KW - Going concern opinions
KW - Predictive accuracy
KW - Type I and II errors
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U2 - 10.1007/s11142-020-09544-x
DO - 10.1007/s11142-020-09544-x
M3 - Article
AN - SCOPUS:85086873527
VL - 25
SP - 1344
EP - 1381
JO - Review of Accounting Studies
JF - Review of Accounting Studies
SN - 1380-6653
IS - 4
ER -