Financial distress, auditors' going concern modification (GCM) and investors' reaction in a concentrated ownership environment: new evidence from the Italian stock market

This paper feeds the literature about investors' reaction to the release of going concern modified audit reports, which is abundant and controversial among scholars. Moving a step beyond the solely detection of abnormal stock returns at and around the event date, as done in the only two previous studies on the Italian setting, we perform an OLS multiple regression to test the informativeness of CARs and the influence of variables as selected firms' accounts, auditor characteristics, the market capitalization and specific measures of financial distress to gather evidence whether investors react adversely to elements different from going concern modifications (GCMs). Based on our findings, investors react negatively to GCMs attached to qualified opinions and, surprisingly, positively to GCMs attached to clean opinions, reversing the prevailing evidence found out in the literature, especially in the USA. We attribute these results to the rough knowledge of Italian naive investors of the going concern (GC) issue. The study detects how disclosure features conceived for large equity markets can lead to different investors' behaviours in small ones on the one hand; on the other hand, it cannot lead to unequivocable generalization, even within similar countries, in light of sub-specific country features. The piece of evidence achieved suggests, for further research, to make an investors categorization to analyse market reactions, which takes more into account three main features stressed by the prevailing literature of small equity markets: high ownership concentration, the higher presence of institutional investors and the poorer reputation of BIG4 auditors.