Stock Market Reaction to Yearly Earnings Announcements for Firms in Financial Distress: Evidences from Italy

Abstract

The purpose of this paper is to feed the debate regarding investor's reaction to relevant financial information releases as yearly earnings announcements (EAs) with a specific focus on financial distressed firms. Using the event study methodology and adopting two well-known tests in the literature, we analyzed Italian listed companies in the period of 2008-2016, to detect whether there is a market reaction to EAs releases for firms in financial distress, adopting as a measure of financial distress the presence in the audit report of a going concern opinion (GCO). In the Italian legislation, the GCO must be communicated immediately to the market and this can be done before, simultaneously or after EAs. The achieved results shed light on the negative impact of EAs of distressed firms receiving a GCO. On the other hand, the possibility that negative abnormal returns are mainly due to the GCO release cannot be neglected. Hence, through additional tests, we found that effects of EAs are more persistent and significant than GCOs, in accordance with the prevailing literature, which sees, on average, EAs predominant information for investors. Our study is pioneering in disentangling possible effects of confounding events for the Italian stock market. The EAs superior effect confirms the dynamics characterizing weak and small equity markets as Italy where, before GCOs releases, some relevant and more precise information (such as earnings magnitude) is often held by shareholders because of the high percentage of family firms and/or concentrated ownership, demonstrating also the weakness of auditor profession if compared with other developed countries.

Auditor’s going-concern opinion prediction: the case of Slovenia

“…Between various countries the rates are different. Gutierrez et al (2015) report the following average rates for countries in Europe (note: all average rates from Gutierrez et al (2015) study are over the period 2000-2012): 2% for Sweden, 3% for Denmark and the Netherlands, 5% for Norway, 6% for Spain (note: Mareque et al (2017) report a rise in rate from 2% in 2007 to 9% in 2010), 13% for France and Germany, and 18% for Italy (note: Carlino, Brunelli, and Giosi (2018) report a rate between 12 and 21% for Italian listed firms in the period [2008][2009][2010][2011][2012][2013][2014][2015]. Surprisingly, for Belgium the reported rate is higher than 20% (Gaeremynck & Willekens, 2003;Knechel & Vanstraelen, 2007;Hardies et al, 2018; note: rates do not cover the same periods).…”

Market Reaction to Modified Audit Opinions: A Systematic Literature Review in Both Developed and Developing Countries

“…This choice of the event date is justified by the purpose of their studies. Indeed, the purpose of the paper of Carlino et al (2018) is to feed the debate regarding investor's reaction to relevant financial information releases as yearly earnings announcements. Grosse and Scott (2018) investigate whether going concern conclusions in the interim (half-yearly) review provide investors with a timely source of useful information, and finally Ruiz-Barbadillo and Guiral (2019) examine the differential impact of expected and unexpected going concern opinions on the market value.…”