Investor reaction to regulated monopolies announcing going concern opinions: What explains contagion among electric services companies?

Abstract

Purpose

This study aims to examine the industry reaction as determined by stock returns when firms in the electric services industry announced receipt of Going concern audit opinions from 1984 through 1991.

Design/methodology/approach

The study utilizes standard event study methodology to test for significant excess performance.

Findings

From 1984 to 1991, going concern opinion (GCO) announcements produce a contagion response in the industry on the announcement date more than half the time. Also, over the event window of the announcement date plus the five days following, six of the seven announcements were accompanied by significant negative industry reaction. Regression analysis suggests non‐announcing a firm's leverage and earnings correlation with the announcing firm significantly impact abnormal returns, as does the exchange on which the announcer's equity is traded, the size of the announcing firm and whether nuclear plant problems were mentioned in the announcement.

Research limitations/implications

The findings suggest that audit opinions provide new information for investors in the electric services industry. Also, GCO announcements in this industry normally result in contagion among rival firms.

Originality/value

This paper provides insights into investor reactions to news contained in Going concern audit opinions in the electric services industry.

Citation

Schaub, M. (2006), "Investor reaction to regulated monopolies announcing going concern opinions: What explains contagion among electric services companies?", Review of Accounting and Finance, Vol. 5 No. 4, pp. 393-409. https://doi.org/10.1108/14757700610712453