Insider trading, litigation concerns, and auditor going-concern opinions

Chen Chen, Xiumin Martin, Xin Wang

Research output: Contribution to journalArticleResearchpeer-review

31 Citations (Scopus)

Abstract

We investigate whether insider selling affects the likelihood of firms receiving auditor going-concern opinions. Prior studies document significant negative market reactions to the issuance of going-concern opinions, indicating that such opinions convey bad news to investors. Insider sales followed by negative news are likely to attract regulators scrutiny and investor class-action lawsuits. Therefore, we predict that, to reduce the risk of litigation, managers have incentives to avoid receiving goingconcern opinions after their insider sales by pressuring auditors for clean audit opinions. We evaluate this prediction empirically and find that the probability of receiving a goingconcern opinion is negatively associated with the level of insider selling. Further analysis indicates that this negative relation is more pronounced for firms that are economically significant to their auditors but less pronounced when (1) auditors have concerns about litigation exposure and reputation loss and (2) audit committees are more independent. Finally, the negative relation between going-concern opinions and insider sales is significantly weakened after SOX.
Original languageEnglish
Pages (from-to)365 - 393
Number of pages29
JournalThe Accounting Review
Volume88
Issue number2
DOIs
Publication statusPublished - 2013
Externally publishedYes

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