Graduation Year

2026

Date of Submission

12-2025

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics-Accounting

Reader 1

Professor Joshua Rosett

Abstract

This thesis follows a three-part analysis of going concern (GC) disclosures by management and auditors and their role in communicating financial distress. It examines whether GC disclosures provide meaningful information to investors, which financial metrics increase the likelihood that management or auditors issue a GC warning, and whether firms experience financial deterioration around these disclosures. The empirical tests begin with an event study measuring stock market reactions at each disclosure date. I then use a logit regression to identify which financial conditions influence management and auditor GC warnings. Finally, I apply a Differences-in-Differences (DiD) approach to evaluate changes in firm performance in the years before and after the initial GC disclosure. The results show that initial GC announcements generate negative and statistically significant abnormal returns, with the largest reaction occurring on the first trading day after the disclosure. Repeated GC warnings do not lose informational value. Instead, fourth and fifth disclosures trigger renewed negative reactions not emphasized in prior research. Auditor-only disclosures generate more statistically significant market reactions than management-only disclosures, although the magnitude of the returns are larger for management GCs on Day 1, potentially due to smaller sample size. Factors such as filing type and management plans have limited impact on market reactions. The logit regressions indicate that auditors and management rely on different financial indicators, with auditors considering a broader set of metrics. The interpretation of results comparing management to auditor GCs is tempered by the small sample size for management-only GCs. The DiD results show that firms begin to deteriorate financially several years before the initial GC warning and continue to decline afterward, though attrition appears to attenuate the post-GC deterioration. These findings suggest that GC disclosures capture a long-running process of financial distress that is visible both before and after the formal issuance of the warning. Overall, the evidence indicates that GC opinions play a meaningful role in both communicating and reflecting the financial condition of distressed firms.

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This thesis is restricted to the Claremont Colleges current faculty, students, and staff.

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