In denial? Stock market underreaction to going-concern audit report disclosures

Richard J. Taffler; Jeffrey Lu; Asad Kausar

doi:10.1016/j.jacceco.2004.09.004

In denial? Stock market underreaction to going-concern audit report disclosures

Richard J. Taffler, Jeffrey Lu, Asad Kausar

Research output: Contribution to journal › Article › peer-review

Abstract

We investigate the stock price reaction to UK going-concern audit report disclosures in the calendar year subsequent to publication. Over this period our firm population underperforms by between 24% and 31% depending on the benchmark adopted. This market underreaction to such an unambiguous bad news release is not a post-earnings announcement drift phenomenon; it is also robust to other potentially confounding explanations. However, whatever the reasons for such stock mispricing, we find costly arbitrage prevents rational investors forcing prices back into line with fundamental value. Our results have implications for the market's ability to impound bad news appropriately and the incompleteness of arbitrage in such small "loser" firm situations. © 2004 Published by Elsevier B.V.

Original language	English
Pages (from-to)	263-296
Number of pages	33
Journal	Journal of Accounting and Economics
Volume	38
Issue number	1-3
DOIs	https://doi.org/10.1016/j.jacceco.2004.09.004
Publication status	Published - Dec 2004

Keywords

Behavioral finance
Investor biases
Limits to arbitrage
Market anomalies

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10.1016/j.jacceco.2004.09.004

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abstract = "We investigate the stock price reaction to UK going-concern audit report disclosures in the calendar year subsequent to publication. Over this period our firm population underperforms by between 24% and 31% depending on the benchmark adopted. This market underreaction to such an unambiguous bad news release is not a post-earnings announcement drift phenomenon; it is also robust to other potentially confounding explanations. However, whatever the reasons for such stock mispricing, we find costly arbitrage prevents rational investors forcing prices back into line with fundamental value. Our results have implications for the market's ability to impound bad news appropriately and the incompleteness of arbitrage in such small {"}loser{"} firm situations. {\textcopyright} 2004 Published by Elsevier B.V.",

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AU - Taffler, Richard J.

AU - Lu, Jeffrey

AU - Kausar, Asad

PY - 2004/12

Y1 - 2004/12

N2 - We investigate the stock price reaction to UK going-concern audit report disclosures in the calendar year subsequent to publication. Over this period our firm population underperforms by between 24% and 31% depending on the benchmark adopted. This market underreaction to such an unambiguous bad news release is not a post-earnings announcement drift phenomenon; it is also robust to other potentially confounding explanations. However, whatever the reasons for such stock mispricing, we find costly arbitrage prevents rational investors forcing prices back into line with fundamental value. Our results have implications for the market's ability to impound bad news appropriately and the incompleteness of arbitrage in such small "loser" firm situations. © 2004 Published by Elsevier B.V.

AB - We investigate the stock price reaction to UK going-concern audit report disclosures in the calendar year subsequent to publication. Over this period our firm population underperforms by between 24% and 31% depending on the benchmark adopted. This market underreaction to such an unambiguous bad news release is not a post-earnings announcement drift phenomenon; it is also robust to other potentially confounding explanations. However, whatever the reasons for such stock mispricing, we find costly arbitrage prevents rational investors forcing prices back into line with fundamental value. Our results have implications for the market's ability to impound bad news appropriately and the incompleteness of arbitrage in such small "loser" firm situations. © 2004 Published by Elsevier B.V.

KW - Behavioral finance

KW - Investor biases

KW - Limits to arbitrage

KW - Market anomalies

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EP - 296

JO - Journal of Accounting and Economics

JF - Journal of Accounting and Economics

IS - 1-3

ER -

In denial? Stock market underreaction to going-concern audit report disclosures

Abstract

Keywords

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