Annual report readability subsequent to going-concern opinions

Abstract

Purpose

This study aims to examine a firm’s disclosure properties subsequent to receiving a going-concern opinion.

Design/methodology/approach

A difference-in-difference research design was used to control for endogeneity issues. Annual report readability is used as a proxy for firm disclosure.

Findings

The results indicate a negative and significant association between issuance of a going-concern report to a firm and the firm’s readability index in the subsequent year. In other words, after receiving a going-concern opinion, a firm’s annual report exhibits increased readability. The results, when broken into subsamples of surviving and failing firms, are concentrated in the surviving firms.

Research limitations/implications

Prior research has shown that firms change their disclosure properties due to endogenous choices motivated by incentive or exogenous shocks. The results of this study, however, suggest that firms that receive going-concern opinions are incentivized to be more forthcoming in disclosing their financial information.

Originality/value

To the authors’ knowledge, this study is the first to investigate how firms’ general disclosures change subsequent to receiving a going-concern opinion.

Citation

Kawada, B.S. and Wang, J.J. (2020), "Annual report readability subsequent to going-concern opinions", Managerial Auditing Journal, Vol. 35 No. 1, pp. 24-42. https://doi.org/10.1108/MAJ-09-2018-2020