Investor Sentiment and Auditor's Going Concern Opinion: Examining the Accuracy of the Auditor's Opinion and Market Reaction to It

Abstract

Investor sentiment is effective on opportunistic managerial behavior in financial reporting. Therefore, sentiments can be expected to relate to external auditors’ risk assessment and opinion. The current research studies the relationship between investor sentiment, the accuracy of the auditor's going concern opinion, and market reaction to the auditor's opinion. For this purpose, the data of 340 firms listed in the Tehran Stock Exchange have been used from 2013 to 2020. The models were fitted using logistic regression with the control of industry effects. The results show the likelihood of reporting concerned opinions is lower when sentiment is high. In addition, the accuracy of the auditor's opinion decreases during high sentiment periods. This means that auditors are less likely to issue going concern opinions to clients with a high probability of bankruptcy in the following year. In additional analyses, this paper shows the market reaction to going concern opinion is attenuated during high sentiment periods.

Keywords

• investor sentiment
• going concern opinion
• going concern opinion accuracy
• meket reaction