Are analysts misleading investors? The case of goingconcern opinions

This paper addresses the role of security analysts in the short-term market reaction to the publication of a going-concern (GC) modified audit report. We find that the 3-day mean abnormal return associated with the GC announcement is at least -6.9% for firms with analyst coverage in comparison with only -2.9% for non-covered firms (significant at <0.01). Our results show that the significant more adverse reaction in the case of followed firms is driven by the trading behavior of retail investors, who are unable to understand that analysts do not always mean what they say. In particular, retail investors are mislead by the 87% of cases where analyst recommendations exert positive or no “pressure” on these non-sophisticated clientele (i.e., “strong buy”, “buy” or “hold”). These optimistic pre-GC recommendations are likely to keep stock prices artificially high and lead investors to delay the incorporation of going-concern uncertainties into stock prices. We conclude that retail investor clientele of GC firms is misled by its naïve interpretation analyst stock recommendations. As such, investors should not rely solely on analysts’ recommendations in their investment decisions and should follow SEC’s advice to do their homework before investing.