Delays in reporting price-sensitive information: The case of going concern

Regulators require firms to disclose all price-sensitive information at the earliest possible date. The going-concern opinion constitutes a fundamental uncertainty for the firm and thus is likely to be of a price-sensitive nature. This paper explores whether going-concern uncertainty disclosures are price sensitive in the London market, and then tests whether managements report such audit report information to investors on a timely basis. We capitalize on a London Stock Exchange regulatory loophole which, in effect, allows financially-distressed firms to choose either to report a forthcoming going-concern at the preliminary results announcement stage, or to delay this crucial information to their annual report release. In line with the regulatory requirements, we expect that firms with more price-sensitive, i.e., more serious, adverse news will disclose their forthcoming going-concern opinion at the earliest stage i.e., in their preliminary announcement, rather than delay to their annual report. We find that there is significant market price reaction associated with the going-concern disclosure, irrespective of when first published, but no evidence that market price reaction to early disclosure is any greater than to late disclosure. However, we do find that late disclosers, paradoxically, are distinguished from early disclosers by having more negative going-concern audit opinions as measured by their narrative content. They are also subject to weaker market monitoring in terms of lower analyst following. We conclude that many managements are postponing going-concern uncertainty disclosures to their annual report. In public policy issue terms, our results suggest that regulators in such situations cannot rely on a general catch-all requirement to ensure managements act in accordance with the relevant listing regulations, instead they need to specify the timing of such information disclosures and monitor firm compliance. Auditors similarly have a role in encouraging timely disclosure of this adverse information. (C) 2007 Elsevier Inc. All rights reserved.