Evidence on whether media disclosure of "subject to" audit opinions affects stock prices

David Edward Letourneau, Louisiana Tech University


A 1986 study by Dopuch, Holthausen, and Leftwich demonstrated that there was a statistically significant negative stock price reaction when the Wall Street Journal (WSJ) announced that a firm had received a "subject-to" qualified audit opinion. The efficient market hypothesis would have predicted that the publication of the fact that a firm had received a qualified audit opinion would produce no price reaction because no new information was included in the announcement.

This study uses more recent data and indicates that the price reaction to audit opinions published in the WSJ does not exist. Tests demonstrate that the apparent price reaction to the WSJ announcement of a qualified opinion only exists if contaminated data are used.

The hypothesis of the study is that there will be no significant price reaction to the announcement in the WSJ that a firm has been awarded a "subject to" qualified audit opinion by its outside auditors--as long as the WSJ announcement contains no other information not previously made public. Cumulative prediction error techniques are used to analyze security price movements around event dates. The sample is constructed from information received from the National Automated Accounting Research System. The final sample of firms that had both a qualified opinion awarded to them, and announcement thereof in the WSJ, consists of 73 data points.

Several interpretations of the results are possible: First, the efficient market hypothesis would have predicted the results achieved. Second, learning has occurred in the marketplace since Dopuch et al.'s seminal article was published in 1986. Finally, one could conclude that the results are sample specific, and do not hold for the population of firms receiving qualified audit opinions.