Do analysts know but not say? The case of going concern opinions

Resumo / Abstract: This study explores whether securities analysts are efficient processors of information related to firms’ going-concern problems. In particular, we test analyst ability to anticipate such bad news. We also present evidence on how these sophisticated agents react to the publication of a going-concern modified (GCM) audit report. We find that analysts signal their anticipation of the publication of a GCM audit report in two ways: 1) they downgrade more aggressively stock recommendations of GCM firms than stock recommendations of control firms as the event date approaches; 2) they are more likely to cease coverage of a GCM firm than a control firm over the one-year period prior to the GCM date. We further show that analysts react to the publication of an actual GCM audit report by stopping coverage of such firms immediately subsequent to the event disclosure. We contribute to the literature by showing that, despite apparent analyst recognition of firms’ going-concern problems, they appear reluctant to report unfavourable recommendations (i.e, “underperform” or “sell”) on GCM firms. As such, we conclude that the role of securities analysts as messengers of bad news may be problematic and analyst relative pessimism and coverage cessation is likely to be associated with negative expectations about firms’ future prospects.

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