Earl R. Wilson

The Incremental Information Content of the Going-Concern Audit Opinion

The responsibility of auditors to assess and report on the ability of an entity to continue as a going concern has received increasing attention in recent years (AICPA [ 1982, 19901). Empirical evidence that such disclosures actually affect investors’ pricing decisions would bolster justification for continuing, perhaps even improving, such disclosures. I lowever, prior research (c.g., Firth [ 1978); Elliott [ 1982); Dodd et al. [1984)), has provided only mixed evidence of a linkage between going-concern decisions and share price revisions. The inconclusive findings of these studies are possibly attributable to their tacit assumption that all going-concern qualified opinions impact security prices in the same manner. Firth ( 1978) found significant price adjustments to going-concern qualifications subsequent to disclosure of the audit opinion for U . K. companies. Chow and Rice (1982) found that qualified audit opinions had a weak negative impact on stock prices, but the extent of the effect depended on the type of qualification. Elliott (1982) and Dodd et al. (1984) found that public announcements of audit qualifications, including going-concern qualifications, had no significant effect on stock returns. However, Dodd et al. ( 1984) observed statistically significant abnormal returns in the months prior to the public disclosure of the going-concern qualifications, suggesting that the economic events leading to the going-concern problems were reflected in share prices prior to the release of thc audit report. Mutchler (1985) and Dopuch et al. (1987) suggest that many goingconcern qualifications simply confirm a pattern of financial deterioration and can be prcdictcd using publicly available information. Going-concern qualifications such as these are likely to be of little “surprise” to the market and are unlikely to convey new information in pricing securities.’

An Empirical Investigation of the Market for 'Single Audit' Services

Audits conducted under the 1984 Single Audit Act go beyond the traditional financial statement audit by placing substantial additional emphasis on the review and evaluation of internal controls and testing of compliance with laws and regulations. The General Accounting Office (GAO), congressional committees, and the American Institute of CPAs (AICPA) have expressed concern about the possible effects of the single audit on audit fees, the quality of single audits, and the effects of alleged low balling. This article provides evidence bearing on these issues, based on data for a national sample of cities.

Implications of GASB's New Reporting Model for Municipal Bond Analysts and Managers

This article explores the implications of the new Government Accounting Standards Board (GASB) Statement No. 34 reporting model for municipal bond analysts and managers. Bond analysts and state and local government managers have overlapping objectives for the use of governmental financial information, but managers also face the costly task of implementing the new model. The new and improved financial information provided by the new reporting model will permit users of the information to better understand a governments long-term and short-term financial position and changes in financial position. The new model also has important ramifications for evaluating performance, particularly regarding the reporting of net costs for each program or function.

The case for mandatory municipal disclosure: Do seasoned municipal bond yields impound publicly available information?

Abstract The purpose of this study is to examine the adequacy of currently available public information in pricing seasoned municipal bonds. Yield premia for bonds with known changes in credit quality are evaluated, employing a procedure which attempts to separate rating decisions which are predictable, using publicly available information, from those which are not. We find that rating decisions which can be predicted using currently available information are anticipated at least two years in advance of the rating announcement. Rating changes which are not predictable, however, are not anticipated by the market. In addition to providing information on the need for additional disclosure regulation in the municipal bond market, this evidence represents a contribution to the municipal, and possibly corporate, bond literature by demonstrating that the expected information content for all rating announcements is not the same.

The incremental value relevance of firm‐specific risk measures in pricing junk IPOs

Purpose – The purpose of this paper is to describe a study which examined the effects of underwriter reputation market segments on the value relevance of firm specific risk measures in the pricing of initial public offerings (IPOs). Design/methodology/approach – The study abandons the notion of a homogenous market for IPOs and focuses instead on the differential demand for information across identifiable segments of the IPO market in the pre-market offering period leading to the first day trading closing prices. Ordinary least square (OLS) regressions were used to test the two hypotheses developed in the paper. Findings – It was found that firm-specific risk measures are associated with the initial trading day returns of IPOs managed by low reputation underwriters, but not those by high reputation underwriters. However, as expected, these risk measures are impounded in initial trading day returns only for a sub-sample of high-risk junk IPOs that were marked down in price by the underwriter prior to the offering in order to make them more attractive to investors. Research limitations – As with all empirical studies the tests are joint tests of the hypotheses stipulated and econometric assumptions underlying OLS. The findings of the study may not be generalized to an unrelated domain. Practical implications – The findings suggest that ex ante risk measures are useful in picking among junk IPOs those with the best chances of survival, and thus earning an initial trading return on those IPOs. Originality/value – This is the first study to look at junk IPOs in a systematic manner using a quasi-experimental design.