Investor overreaction to going concern audit opinion announcements

Abstract

The finance literature extensively documents the existence of stock market anomalies, such as the January effect, the day of the week effect and the small firm effect. Many of these anomalies were discovered or clarified while investigating what has come to be known as the overreaction hypothesis. This paper examines investor overreaction to going concern audit opinion announcements made in the major financial press. The evidence presented suggests the sell-off by investors on the announcement date is followed by a major buy-back of the announcing firms’ shares over the next few days. For the 79 announcing firms in the sample spanning 1984 to 1996, nearly 70% of the average losses on the announcement date are recovered the five days following going concern audit opinion announcements.