We contribute to auditing literature by examining trading behavior of mutual and pension funds around first-time going concern modified opinions (GCMO). We find that mutual funds are significant net sellers of GCMO firms in the period before the GCMO announcement and then decrease their net selling at the GCMO announcement. In contrast, pension funds appear to be less active net sellers in the pre-GCMO period and then significantly increase their net selling as an immediate response to the GCMO announcement, and then reduce their net selling in the post-GCMO period. Our net selling results are robust to a battery of additional tests, including alternative specifications of the GCMO event window, using an extended pre-GCMO benchmark period, controlling for 8-K and earnings announcements, excluding subsequently bankrupt firms and using change variables in our models. In additional analyses, we find that overall trading volume increases for both mutual and pension funds at the GCMO announcement. Our examination of trading behavior provides initial evidence on differences between these two groups of institutional investors in their trading response to first-time GCMOs, and enables us to provide a more robust assessment of the information content of GCMOs for these different groups of sophisticated market participants.
