Insider Trading, Litigation Concerns, and Auditor Going-Concern Opinions

Posted: 26 Aug 2012 Last revised: 8 Apr 2020

See all articles by Chen Chen

Chen Chen

Monash University - Department of Accounting

Xiumin Martin

Washington University in Saint Louis - Olin School of Business

Xin Wang

The University of Hong Kong

Date Written: August 24, 2012

Abstract

We investigate whether insider selling affects the likelihood of firms receiving auditor going-concern opinions. Prior studies document significant negative market reactions to the issuance of going-concern opinions, indicating that such opinions convey bad news to investors. Insider sales followed by negative news are likely to attract regulators’ scrutiny and investor class-action lawsuits. Therefore, we predict that, to reduce the risk of litigation, managers have incentives to avoid receiving going-concern opinions after their insider sales by pressuring auditors for clean audit opinions. We evaluate this prediction empirically and find that the probability of receiving a going-concern opinion is negatively associated with the level of insider selling. Further analysis indicates that this negative relation is more pronounced for firms that are economically significant to their auditors but less pronounced when (1) auditors have concerns about litigation exposure and reputation loss and when (2) audit committees are more independent. Finally, the negative relation between going-concern opinions and insider sales is significantly weakened after SOX.

Keywords: Insider trading, litigation risk, going-concern opinion, SOX

JEL Classification: G18, M42, G48

Suggested Citation

Chen, Chen and Martin, Xiumin and Wang, Xin, Insider Trading, Litigation Concerns, and Auditor Going-Concern Opinions (August 24, 2012). Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2135441 or http://dx.doi.org/10.2139/ssrn.2135441

Chen Chen

Monash University - Department of Accounting ( email )

Building H, Level 3
Caulfield campus
Melbourne, Victoria 3800
Australia

Xiumin Martin (Contact Author)

Washington University in Saint Louis - Olin School of Business ( email )

Saint Louis, MO 63130
United States

Xin Wang

The University of Hong Kong ( email )

1215 K.K.Leung Building
Hong Kong
Hong Kong

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