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    Going Concern Opinion and Cost of Equity
    research summary posted March 9, 2015 by Jennifer M Mueller-Phillips, tagged 12.0 Accountants’ Reports and Reporting, 12.01 Going Concern Decisions 
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    Title:
    Going Concern Opinion and Cost of Equity
    Practical Implications:

    The evidence in this study illuminates the relevance of going concern opinions and the value of the information embedded in them. We provide evidence that investors perceive companies with going concern opinions to be problematic and thus demand a higher cost of equity. The results of our study are relevant to discussions about the desirability of the new going concern disclosures currently being considered by the FASB and the PCAOB.

    For more information on this study, please contact Jagan Krishnan.

    Citation:

    Amin, Keval, Jagan Krishnan, and Joon S. Yang. 2014. Going concern opinion and cost of equity. Auditing: A Journal of Practice and Theory 33 (4): 1–39.

    Keywords:
    going concern opinion, cost of equity, PCAOB
    Purpose of the Study:

    We examine whether companies that receive a going concern opinion suffer a subsequent increase in cost of obtaining equity capital from investors. 

    Design/Method/ Approach:

    We use data relating to public companies and their auditors for the period 2000-2010. We test the association between the going concern opinion and the cost of equity capital by comparing our test sample of companies with going concern opinions with two control samples with no going concern opinions, the first consisting of financially distressed companies, and the second consisting of companies with similar likelihood as the test firms of receiving going concern opinions.

    Findings:
    • We document that the issuance of the going concern opinion is positively associated with the company’s subsequent cost of equity capital.
    • We also find that the issuance of a first-time going concern opinion is associated with a subsequent increase in the cost of equity capital. The cost of equity is estimated to increase between 3.3 percent and 5.7 percent for companies that receive a first-time going concern opinion.
    • The main findings are robust to sensitivity tests using various subsamples, time periods, and multiple methods for computing the cost of equity capital.
    Category:
    Accountants' Reporting
    Sub-category:
    Going Concern Decisions