At what life-cycle stage does the auditors' going concern report add value?

In this paper, we examine the market reaction to going concern audit opinions (GCAO) issued to firms in different life-cycle stages. We find that for firms in the introduction, decline, and shakeout stages there is information content at the time of the publication of a GCAO, reflected by a significant and negative market reaction for these firms relative to mature stage firms. This differential reaction for these life-cycle stages exists for both first-time and second-time GCAO reports, as well as for a subsample of financially distressed firms. Controlling for confounding events, such as debt covenant violations and earnings surprises, these results provide evidence that the auditors' going concern report provides valuable information to the market during certain life-cycle stages and is consistent with the notion that information opacity exists in early and late life-cycle stages. Furthermore, we find that the variation in the information content of the audit report is conditional on high investor attention. This study overcomes conflicting evidence from prior literature, as to whether the market reacts to a GCAO issuance and whether the market understands the differences in firms' business strategies in each life-cycle stage, by showing that only after including life-cycle stages is a significant market reaction observed, and that this reaction differs across the stages.