Allen D. Blay

Market Expectations for First-Time Going-Concern Recipients

Prior research on market reaction to going-concern modifications indicates that unanticipated modifications cause a negative market reaction, whereas anticipated modifications produce no similar reaction. This paper uses previously proposed measures of market expectations and a naive model—actual subsequent viability status—to assess market reaction to going-concern report recipients. Our results indicate that a naive measure of market expectations provides information to the market that is incremental to previously developed measures when using market reaction as an indication of changed expectations. Multiple regression analyses controlling for firm size, going-concern expectation, bankruptcy probability, changes in financial condition, default status, and delisting support our finding of differential abnormal returns based on subsequent viability, and indicate a need for improved models of market expectations.

Can Moral Reasoning Reduce Auditor Misreporting? An Experimental Examination of Investor Salience and an Auditor Sign-Off Requirement

Researchers have questioned whether individual differences in moral reasoning might partly account for the variation in auditor misreporting behavior documented in prior experimental-markets research in auditing. In the first experimental market study to directly test the relation between moral reasoning and auditor misreporting, however, Schatzberg et al. (2005) find that auditor misreporting is more likely with higher than with lower moral reasoning participants as measured by the DIT (Rest 1979). We re-examine the link between moral reasoning and auditor misreporting by manipulating two factors expected to increase moral reasoning and by using alternative measures of moral reasoning from the JPI-R (Jackson 1994). Using the same experimental audit market setting in Schatzberg et al., we find that auditor misreporting is lower when the investor is another participant in the experiment than when the investor is an abstract robot. Auditor misreporting is also lower when the auditor is required to sign off on the audit report, but only when the investor is another participant. In fact, auditor misreporting essentially disappears when the sign-off requirement is present and the investor is another participant in the experiment. Finally, we find that auditor misreporting is negatively associated with the auditor’s score on two measures of moral reasoning from the JPI-R: Traditional Values and Responsibility. Our results provide strong evidence that moral reasoning can reduce auditor misreporting in a market setting where financial incentives to misreport are present.