Mandating Managerial Disclosure of ‘Bad News’: The Case of IPOs with Going Concern Concerns Khrystyna Bochkay University of Miami [email protected]Roman Chychyla University of Miami [email protected]Srini Sankaraguruswamy National University of Singapore [email protected]Michael Willenborg University of Connecticut [email protected]Preliminary and Incomplete Abstract In this paper, we examine the impact of the shift from voluntary to mandatory disclosure of going con- cern on the information environment of IPO firms. In August 2014, the Financial Accounting Standards Board (FASB) mandated all managers to evaluate their companies’ ability to continue as a going con- cern (GC) and, if substantial doubt exists, provide related footnote disclosures. Previously, no such guidance existed and the company’s GC status was the sole purview of the auditor. In this paper, we ex- amine the impact of the FASB’s mandate on the frequency of going concern signals among IPO issuers, characteristics of IPOs with going concern, and the informativeness of going concern information for IPO pricing. We find that the proportion of IPOs with management GC disclosures and auditor GC opinions more than doubled following the FASB’s mandate. We also find that this sharp increase in GC reporting is due to changes in managers’ and auditors’ GC reporting strategies, and not due to changes in IPO risk characteristics. In terms of information content, we find weaker associations between going concern disclosures/opinions and IPO price revision and initial return following the FASB’s regulation. Collectively, we find that following the disclosure mandate going concern signals increase in frequency, yet become less relevant for IPO pricing. Keywords: auditor going concern opinions, management going concern disclosures, voluntary disclo- sure, mandatory disclosure, initial public offerings, price revision, underpricing. We would like to thank Sundaresh Ramnath, Miguel Minutti-Meza, Emmanuel De George, Jake Krupa, Matt Phillips, and Anthony Joffre for their valuable comments and suggestions.
Transcript
Mandating Managerial Disclosure of ‘Bad News’: The Case ofIPOs with Going Concern Concerns
In this paper, we examine the impact of the shift from voluntary to mandatory disclosure of going con-cern on the information environment of IPO firms. In August 2014, the Financial Accounting StandardsBoard (FASB) mandated all managers to evaluate their companies’ ability to continue as a going con-cern (GC) and, if substantial doubt exists, provide related footnote disclosures. Previously, no suchguidance existed and the company’s GC status was the sole purview of the auditor. In this paper, we ex-amine the impact of the FASB’s mandate on the frequency of going concern signals among IPO issuers,characteristics of IPOs with going concern, and the informativeness of going concern information forIPO pricing. We find that the proportion of IPOs with management GC disclosures and auditor GCopinions more than doubled following the FASB’s mandate. We also find that this sharp increase in GCreporting is due to changes in managers’ and auditors’ GC reporting strategies, and not due to changesin IPO risk characteristics. In terms of information content, we find weaker associations between goingconcern disclosures/opinions and IPO price revision and initial return following the FASB’s regulation.Collectively, we find that following the disclosure mandate going concern signals increase in frequency,yet become less relevant for IPO pricing.
We would like to thank Sundaresh Ramnath, Miguel Minutti-Meza, Emmanuel De George, Jake Krupa, MattPhillips, and Anthony Joffre for their valuable comments and suggestions.
I. INTRODUCTION
Under the generally accepted accounting principles (GAAP), the preparation of financial state-
ments relies on the going concern assumption – that a company will last long enough to fulfil its
plans and commitments. Up until recently, a mandatory assessment of the company’s going con-
cern status was the sole purview of the auditor. In contrast, managers who are the most familiar
with operations and risks of their firms voluntarily made a determination of the going concern sta-
tus, and disclosed this in the risk factors, management discussion and analysis, and the footnote
sections of financial reports (Mayew et al. 2014; Bochkay et al. 2018). In August 2014, the Fi-
Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncer-
tainties about an Entity’s Ability to Continue as a Going Concern (hereafter, ASU 2014-15), re-
quiring all managers to evaluate the going concern status of their firms and, if substantial doubt
exists, provide related footnote disclosures. Hence, there has been a shift from voluntary to manda-
tory disclosure by managers of going concern uncertainties. In this paper, we examine the impact
of ASU 2014-15 on the frequency of going concern disclosures, characteristics of going concern
disclosers, and the informativeness of going concern information.
While the rationale behind the FASB’s mandate of ASU 2014-15 and other standards is to im-
prove the quality of information available to firm outsiders, there is a mixed evidence on whether
FASB standards, on average, improve firms’ information environment (Khan et al. 2017). There
are three possible outcomes of the shift from voluntary to mandatory disclosure of going concern
uncertainties. First, the informativeness of management going concern disclosures may not change
since firms were already voluntarily disclosing such information (Grossman and Hart 1980; Gross-
man 1981; Milgrom 1981). Second, mandated going concern disclosures may be more informative
as the standard forces firms to disclose unfavorable going-concern risks even if such disclosures
reveal proprietary information (Verrecchia 1983; Dye 1985; Wagenhofer 1990; Jorgensen and
Kirschenheiter 2003). Finally, the informativeness of going concern disclosures may decrease if
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managers start issuing more going concern warnings, even when going concern risks are low, to
reduce the likelihood and cost of potential litigation (Skinner 1994; Kasznik and Lev 1995; Field
et al. 2005; Nelson and Pritchard 2016).
Even though ASU 2014-15 was intended to change management’s reporting of going concern
uncertainties and does not directly affect the auditor, there are several reasons to expect that audi-
tors would change their reporting strategy alongside managers.1 First, the SEC usually institutes
a program to enforce compliance with new standards. The increased regulatory oversight (or even
the perception of increase in oversight) in the post-ASU 2014-15 period likely increases both man-
agers’ and auditors’ attention to periodic going concern assessments. Second, given that managers
are now required to make going concern disclosures if substantial doubt exists, and that these
disclosures are subsequently reviewed by external auditors who also make their own independent
assessments of going concern, it is reasonable to expect that if managers change their disclosure
strategy in response to regulation, auditors will too. Third, the release of ASU 2014-15 likely in-
creased firms’ litigation risk and investor scrutiny. Arguably, in the post-ASU 2014-15 period, the
absence of going concern disclosures by auditors and management prior to firm financial distress
is likely to generate greater shareholder litigation. Managers and external auditors could anticipate
the increase in litigation risk and become more conservative by issuing more going concern disclo-
sures and opinions ex ante to reduce the likelihood of a lawsuit (Skinner 1994; Field et al. 2005).
On the other hand, when putting ASU 2014-15 standard up for discussion and comments as
part of the rule making process, the FASB expressed a concern that auditors might reduce the
instances of going concern opinions. Specifically, the FASB was concerned that the definition
of substantial doubt in ASU 2014-15 for managers approximates the upper end of the range in
the present definition of substantial doubt used by auditors. As such, less risky firms may be
classified as having a going concern problem under the definition used by auditors but not under
the definition used by managers. This may result in auditors increasing their range to overlap
1For publicly-traded firms’ audits, PCAOB’s Staff Audit Practice Alert No. 13 indicates that “The AU sec. 341requirements for the auditor’s evaluation, and the auditor’s reporting when substantial doubt exists, have not changedand continue to be in effect.”
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more with the management assessment, thus, decreasing the instances of auditor going concern
opinions. Finally, auditors could now forgo border-line going concern cases as long as managers
present a reasonable set of actions to address the going concern problem. While managers could
have privately communicated with auditors on going concern issues and potential solutions in the
pre-ASU 2014-15 period, the public release of such information makes it more actionable.
We use financial reports of firms pursuing an initial public offering (IPO) to examine the ef-
fect of the change in the going concern disclosure regime - from voluntary to mandatory - on
the frequency and informativeness of going concern information signals. The IPO setting offers
several advantages to answer our research questions. Lack of prior history and public disclosures
for IPO firms makes this setting especially salient to study the effect of mandating management
disclosures of ‘bad news.’ Moreover, since IPOs fall under the purview of the 1933 Act, higher
litigation environment for IPOs increases the power of our tests when comparing managers’ bad
news disclosures under voluntary vs. mandatory disclosure regimes. Finally, the process of IPO
“book-building” allows us to test pricing effects associated with changes in going concern signals
due to the shift in disclosure regimes.
Our sample consists of 1,501 firm-commitment share IPOs by non-financial domestic compa-
nies from the beginning of January 2001 up until the end of September 2019. We find that out
of 1,060 IPOs during the pre-ASU 2014-15 period, 84 (7.93 percent) IPOs voluntarily made ex-
plicit going concern disclosures, while another 133 (12.55 percent) IPOs voluntarily discussed loss
and liquidity issues in the prospectus footnotes. In all of these cases, auditors did not issue going
concern opinions in the audit report. We observe a substantial increase in the proportion of going
concern disclosures made by managers in the post-ASU 2014-15 period.2 Specifically, out of 243
IPO firms in the post period, 47 (19.34 percent) made explicit going concern disclosures and addi-
tional 55 (22.63 percent) IPOs discussed loss/liquidity problems in the footnotes. Even though the
FASB’s going concern disclosure regulation was only pertaining to managers, we observe a consid-
2We define pre-ASU 2014-15 period from January 1, 2001, till the publication date of ASU 2014-15 August 27,2014. We define post-ASU 2014-15 period from the date the standard became effective, December 15, 2016, till thelast date in our sample period, September 30, 2019. We define the period between August 27, 2014, and December15, 2016, as the transition period.
3
erable increase in the going concern opinion frequency by auditors. Specifically, the frequency of
auditor going concern opinions increases from 7.26 percent IPOs in the pre-ASU 2014-15 period
to 19.34 percent in the post period. Interestingly, we observe increases in the frequency of going
concern disclosures and opinions among both financially healthy and financially distressed firms.
Overall, these univariate results suggest that the new FASB standard led to a substantial increase
in going concern disclosures made by management and in going concern opinions issued by the
auditors. The latter finding is contrary to the FASB’s expectations, and suggests that mandating
management disclosures of going concern had significant (and likely unintended) consequences on
auditors’ assessment of going concern.
We next examine whether the increase in the frequency of going concern disclosures and opin-
ions is due to riskier firms going IPO or due to both managers and auditors becoming more conser-
vative in their going concern assessments following ASU 2014-15 mandate. To answer this ques-
tion, we estimate determinants models for the likelihood of observing a going concern disclosure
and going concern opinion in the pre- and post-ASU 2014-15 periods. As part of the determinants,
we use different firm characteristics that reflect IPOs’ size, age, transaction risk, distress probabil-
ity, litigation risk, debt problem, and asset liquidity. We then use the coefficient estimates from
the going concern disclosure models to predict the likelihood of such disclosure in the pre- and
post-ASU 2014-15 periods. In similar manner, we calculate the predicted likelihood of auditor go-
ing concern opinion. Consistent with our univariate results, we find that the predicted probability
of a going concern disclosure and going concern opinion is around 14.9 percent and 24.1 percent
greater, respectively, in the post-ASU 2014-15 period relative to the pre-period. We also find that
the differences in predicted likelihoods across the pre- and post-periods can be fully explained by
changes in managers’ and auditors’ reporting strategies, and not by riskier firms going public in
the post period. In other words, the increase in the frequency of going concern disclosures and
opinions is the outcome of both managers and auditors becoming more likely to report ‘bad news’
in the post-ASU 2014-15 period. We observe similar results across all distress terciles, suggesting
that manages and auditors of financially distressed as well as financially healthy firms changed
4
their going concern reporting strategies.
Willenborg and McKeown (2000) find that auditor going concern opinions reduce information
asymmetry, resulting in less IPO underpricing. Bochkay et al. (2018) find that management vol-
untary disclosures of going concern uncertainties are incremental to auditor opinions - they lead
to negative price revisions during the book building process of an IPO and more efficient price
discovery. However, substantial changes in the frequency of both management going concern dis-
closures and auditor going concern opinions in the post-ASU 2014-15 period are likely to affect
the informativeness of going concern signals in IPO pricing. Therefore, we next compare the rela-
tion between going concern disclosures and opinions and IPO price formation and first day return
across the pre- and post-ASU 2014-15 periods.
We find that IPOs with voluntary going concern disclosures in the pre-ASU 2014-15 period
have the mean (median) price revision of -14.37 (-11.51) percent, while IPOs in the post-period,
where going concern disclosures are mandated, have the mean (median) price revision of -2.83 (0)
percent. As for going concern audit opinions, we find that the mean (median) price revision for
IPOs with a going concern opinion is -26.40 (-26.67) percent in the pre-ASU 2014-15 period and
weakens to -6.28 (0) percent in the post-period. We do not observe similar patters for IPOs with no
going concern uncertainties, suggesting that our results are specific to the going concern signals.
When we control for other IPO characteristics relevant to the IPO price formation (e.g., prospectus
Shift from Voluntary to Mandatory Disclosure of Going Concerns
Up until the passage of ASU 2014-15, managers’ evaluation and disclosure of going concerns
uncertainties were completely voluntary. That is, managers’ decision about whether to disclose
a going concern uncertainty or not was the outcome of costs relative to the benefits of withhold-
ing such bad news. Bochkay et al. (2018) examine the determinants of voluntary going concern
disclosures in the IPO setting and find that managers are less likely to disclose going concern un-
certainties if they have financial incentives to do so. At the same time, managers make more going
concern disclosures if the overall transaction risk of an IPO is high. Following ASU 2014-15,
when going concern disclosures are mandated, the incentive-based arguments no longer apply as
now all managers are required to evaluate whether there are conditions or events that might under-
mine a company’s ability to continue as a going concern within one year of issuance/availability
of financial statements. In addition, if the going concern problem exists, managers are required to
discuss plans and strategies intended to mitigate the problem of substantial doubt. Management
disclosures of going concern are subsequently evaluated by the auditors.
Even though publicly-traded or about to be publicly-traded firms have already been subject
to many disclosure requirements (e.g., risk factor disclosures, management discussion and analy-
sis in annual and quarterly SEC reports), the new FASB’s mandate of going concern disclosures
represents a significant change in firms’ disclosure practices, especially for firms facing financial
difficulties. Therefore, an important question that remains unanswered is whether these additional
disclosure requirements improved firms’ information environment.
Prior theoretical and empirical studies predict three potential outcomes of mandating going
concern disclosures - no change, increase, or decrease in information value. While the rationale
behind the FASB’s mandate of ASU 2014-15 and other standards is to improve the quality of
information available to firm outsiders, there is a mixed evidence whether FASB standards, on
average, improve firms’ information environment (Khan et al. 2017). Classic disclosure models
deem regulatory intervention by standard-setters such as FASB to be ineffective if disclosure is
costless to firms (Grossman and Hart 1980; Grossman 1981; Milgrom 1981). These models pre-
9
dict that managers who have private information would voluntarily disclose both favorable and
unfavorable information due to market forces. Under this view, ASU 2014-15 mandate is unlikely
to enhance the informativeness of going concern disclosures as firms were already voluntary dis-
closing going concern uncertainties in financial reports (Mayew et al. 2014; Bochkay et al. 2018).
On the other hand, if disclosure is costly (e.g., it reveals proprietary information), managers will
disclose information only if it is sufficiently favorable, and are less likely to disclose unfavorable
or potentially damaging information, such as going concern risks (Verrecchia 1983; Dye 1985;
Wagenhofer 1990; Jorgensen and Kirschenheiter 2003). Comment letters on the proposed FASB’s
draft related to the going concern disclosures suggest that going concern disclosures may reveal
proprietary information such as management plans or potential effects of the conditions and events
that lead to going concern uncertainties.4 Therefore, ASU 2014-15 mandate can reduce informa-
tion asymmetry by forcing management to disclose (unfavorable) going-concern risks even though
such disclosures may reveal proprietary information. Finally, the mandate of management going
concern disclosures can lead to an increase in firms’ investor scrutiny and, as a result, higher lit-
igation risk and regulatory oversight. Therefore, managers are likely to respond to the increased
scrutiny and litigation risk by providing more going concern disclosures, even when going concern
risks are low (Skinner 1994; Kasznik and Lev 1995; Field et al. 2005). This in turn may reduce the
overall informativeness of going concern signals.
Impact on Auditors
The issuance of ASU 2014-15 resulted in mandatory management evaluations and disclosure of
going concern uncertainties. While the auditors’ responsibility of evaluating companies’ GC status
remains the same (see AU sec. 341 or AS 2415), there are several reasons to expect changes in
the auditors’ tendency to issue a going concern opinion in the post ASU 2014-15 period. First,
in response to a new FASB rule, the SEC institutes a compliance program that ensures that all
SEC registrants, who are subject to the rule, comply accordingly. Given the increased regulatory
4See comment letter summary at https://www.fasb.org/cs/BlobServer?blobkey=id&blobnocache=true&blobwhere=1175827886951&blobheader=application%2Fpdf&blobcol=urldata&blobtable=MungoBlobs.
scrutiny, auditors could increase their attention to firms’ going concern uncertainties and issue
more going concern opinions as a result. Second, managers and members of the board of directors
could seek greater auditor engagement on the going concern issue, resulting in more going con-
cern opinions. Third, in the post-ASU 2014-15, the absence of going concern warnings by auditors
prior to firm financial distress is likely to generate greater shareholder litigation.5 In an experiment
of juror decision-making, Owens et al. (2019) find that jurors find auditors more accountable for
investor loses in the post ASU 2014-15 period relative to the pre-period. Auditor blame further
increases in situations when managers make going concern disclosures and auditors do not issue a
going concern opinion. Collectively, greater regulatory and investor scrutiny and increased litiga-
tion risk could increase the likelihood of auditor going concern opinions in the post-ASU 2014-15
period.
There are also reasons to expect a reduction in auditor going concern opinions. When putting
ASU 2014-15 standard up for discussion and comments as part of the rule making process, in one
of the questions (specifically, Question 19 in the exposure draft open for comments), the FASB was
concerned about the impact of the standard on the auditors’ going concern opinion. Specifically,
the definition of substantial doubt in ASU 2014-15 for managers approximates the upper end of
the range in the present definition of substantial doubt used by auditors. In other words, less risky
firms may be classified as having a going concern problem under the definition used by auditors
but not under the definition used by managers. This may result in auditors increasing their range
to overlap more with the management assessment, thus, decreasing the instances of auditor going
concern opinions.
To summarize, even though the FASB’s ASU 2014-15 was mandating management disclosures
of going concern uncertainties, the issuance of the standard could have resulted in significant (and
likely unintended) consequences on auditors’ going concern assessments.5When clients file for bankruptcy or experience substantial financial difficulties, auditors can face increased liti-
gation risk and reputational damage (Palmrose 1987; Carcello and Palmrose 1994; Lys and Watts 1994; Lennox andKausar 2017).
11
III. SAMPLE, VARIABLES, AND DESCRIPTIVE STATISTICS
We summarize our sample construction in Panel A of Table 1. Using the Thomson Financial
SDC database, we identify 3,030 firm-commitment IPOs by US companies from the beginning
of January 2001 up until the end of September 2019. We focus on share IPOs by non-financial
issuers and exclude 1,189 IPOs by financial companies (SIC 6XXX; mostly closed-end funds and
real estate investment trusts [REITs]) and 226 unit IPOs. Further, we exclude 77 IPOs lacking
necessary financial information. Since our interest is in book-built IPOs, we exclude 15 IPOs sold
via auction (Degeorge et al. 2010). As in Edelen and Kadlec (2005), we exclude 15 IPOs with
the initial price range mid-point of less than $5 and seven IPOs with days between the intial price
range date and IPO date exceeding 365 days. Our final sample consists of 1,501 IPOs, with 1,060
IPOs in the pre-ASU 2014-15 period (prior to August 27, 2014) and 243 IPOs in the post-ASU
2014-15 period (after December 15, 2016). There are 198 IPOs in the transition period – the period
between August 27, 2014, and December 15, 2016.
We are interested in understanding the impact of ASU 2014-15 mandate on the frequency and
informativeness of management going concern disclosures and auditor going concern opinions.
To measure the informativeness of going concern signals in IPO pricing, we use the IPO price
revision during the book building period and stock return on the first day of trading. We identify
prospectuses that provide the initial price range and review them to identify explicit references
to the term “going concern” in management disclosures or management disclosures of loss and
liquidity issues that might undermine a company’s future operations and success. To examine
the informativeness of voluntary management going concern disclosures, Bochkay et al. (2018)
focus on only explicit “going concern” mentions in IPO prospectuses. However, upon reviewing
the prospectuses in the post-ASU 2014-15 period, it became evident that many issuers discuss the
going concern problems without specific references to phrases “going concern” or “continuity of
operations.” Therefore, we code IPO prospectuses that explicitly mention “going concern” as GC
Disclosure IPOs and those that discuss loss and liquidity problems as Loss/Liquidity Disclosure
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IPOs.
Panel B of Table 1 provides summary statistics on the frequency of going concern disclosures
in IPO prospectuses across time periods and also for the full sample. In our pre-ASU 2014-15 sam-
ple of 1,060 IPOs, 84 IPOs (or 7.9 percent) provided explicit GC Disclosure in either footnotes (4.7
percent) or other sections of the prospectus (3.2 percent), while another 133 (12.5 percent) made
Loss/Liquidity Disclosure in the footnotes. Interestingly, we observe that the going concern disclo-
sure frequency starts to increase after the release of ASU 2014-15. Specifically, in the transition
period when the FASB standard was released, but not yet effective, we observe that out of 198
IPOs, 30 (or 15.2 percent) and 42 (21.2 percent) IPOs had GC Disclosure and Loss/Liquidity Dis-
closure, respectively. In the post-ASU 2014-15 period, out of 243 IPOs, 47 (or 19.3 percent) IPOs
made explicit GC Disclosure, while another 55 (22.6 percent) provided Loss/Liquidity Disclosure.6
As for auditor going concern opinions, we observe that 77 (7.3 percent) IPOs had a going
concern opinion (GC Opinion) in the pre-ASU 2014-15 period, while 26 (13.1 percent) and 47
(19.4 percent) IPOs had a going concern opinion in the transition and post-ASU 2014-15 period,
respectively. Sharp increases in the frequency of going concern disclosures and opinions after the
FASB release of ASU 2014-15 suggest that both managers and auditors responded to the shift in
disclosure regime from voluntary to mandatory. The result for auditors is especially surprising,
given that regulatory requirements for the auditor’s evaluation of going concern have not changed.
Our next analyses examine the increases in going concern disclosure and opinion frequencies and
test the impact of such increases on IPO pricing.
There are two potential explanations for why the frequency of management going concern dis-
closures and auditor going concern opinions more than doubled in the post-ASU 2014-15 relative
to the pre-period. One is that more risky firms go public after the FASB’s mandate of management
going concern disclosures. The other one is that managers and auditors became more conservative
after the disclosure mandate, perhaps due to greater regulatory scrutiny of going concern uncertain-
ties and higher expected litigation risk. The former explanation seems less plausible as it is hard to
6In the post-ASU 2014-15 period, all IPO firms, with exception of Decor Holdings, Inc., provided going concerndisclosures in the footnotes to financial statements as prescribed by the FASB standard.
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imagine that the FASB’s disclosure mandate would attract riskier firms to go public. There could
be other events coinciding with the FASB’s release of ASU 2014-15 that attract risky IPOs. How-
ever, we find the gradual increase in the frequency of going concern signals across pre-, transition,
and post- periods, making it unlikely that some other changes in the IPO market are driving our
results. Nonetheless, our analyses in Section IV.1 attempt to disentangle between the two potential
explanations.
In Table 2, we present more comprehensive descriptive statistics for IPO observations in the
pre- and post-ASU 2014-15 periods along four mutually exclusive groups with respect to going
concern: (1) GC Opinion; (2) GC Disclosure; (3) Loss/Liquidity Disclosure; and (4) All Other,
IPOs that have neither going concern disclosures nor going concern opinions.7 Since voluntary go-
ing concern disclosures appeared in different sections of the prospectus (e.g., risk factors, MD&A,
footnotes), we split GC Disclosure category into footnote (FN) and non-footnote (Non-FN) cate-
gories. For each IPO category, we tabulate the mean (median) for all dependent and independent
variables of interest. We provide definitions of all variables in Appendix A.
Comparing the descriptive statistics in the pre- and post-ASU 2014-15 periods, we observe that
the IPO market is much “hotter” in the post period – the average IPOReturn is 13.80 percent in the
pre-period relative to 23.09 percent in the post period. We also observe that IPO firms in the post-
ASU 2014 period tend to be more distressed (i.e., have negative net income, negative operating
cash flow, or negative working capital), younger, more likely to be a start-up, and burn cash faster.
Specifically, the mean (median) Distress in the pre-ASU 2014-15 period is 0.29 (0.14), while the
mean (median) Distress in the post-period is 0.37 (0.22). Around 11 percent of IPOs in the pre-
period are listed as start-up firms (StartUp), while this percentage increases to 31 percent in the
post-period. The mean (median) OCF/Assets, annualized operating cash flow divided by average
assets, is -12.47 (2.68) and -35.29 (-24.40) in the pre- and post-ASU 2014-14 periods, respectively.
The average firm age, Age, for IPOs in the pre-ASU 2014-15 period is 19.29 years, while IPO firms
7We do not tabulate results for the transition period (the period after the FASB’s standard mandate but before itseffective date) for presentation purposes and also to avoid misclassifying observations as voluntary going concerndisclosures if managers started already responding to the FASB’s release of ASU 2014-15.
14
in the post period are around 14.58 years old. We also find that CashBurn (the extent to which on-
hand liquid assets plus expected IPO proceeds could sustain an issuer’s historical operating and
investing cash flow) are 0.10 and 0.30 on average in the pre- and post-ASU 2014-15 periods,
respectively.
With regard to price formation, both PriceRevision and InitialReturn (i.e., the percentage
change from the IPO offer price to the closing price on the first trading day), increase across
four categories of going concern and also across time periods when switching from a voluntary to
mandatory disclosure regime. IPOs with voluntary GC Disclosure in the pre-ASU 2014-15 period
have the mean (median) PriceRevision of -14.37 (-11.51) percent, while IPOs in the post-period,
where going concern disclosures are required, have the mean (median) PriceRevision of -2.83 (0)
percent. The mean (median) PriceRevision of Loss/Liquidity Disclosure IPOs is -7.82 (0) percent
in the pre-ASU 2014-15 period and increases to 3.51 (0) percent in the post-period. For GC Opin-
ion IPOs, the mean (median) PriceRevision increases from -26.40 (-26.67) percent in the pre-ASU
2014-15 to -6.28 (0) percent in the post-period. Importantly, we do not observe similar increasing
patters in PriceRevision for All Other IPOs, suggesting that these results are specific to the going
concern signals. Overall, similar to findings in Bochkay et al. (2018), we observe that GC Opin-
ion IPOs have the most negative PriceRevision, followed by GC Disclosure IPOs, Loss/Liquidity
Disclosure IPOs, and by All Other IPOs. However, these patterns are much weaker following the
FASB’s mandate of management going concern disclosures.
As for InitialReturn, we find that the mean (median) initial return of GC Disclosure IPOs is 9.77
(4.58) percent during the pre-ASU 2014-15 period, whereas the mean (median) InitialReturn in the
post-period is 14.21 (6.17) percent. The mean (median) InitialReturn of Loss/Liquidity Disclosure
is 17.54 (10.33) percent in the pre-ASU 2014-15 period and increases to 24.96 (19.23) percent in
the post-period. For GC Opinion IPOs, the mean (median) InitialReturn increases from 3.42 (0)
percent in the pre-ASU 2014-15 to 14.59 (1.60) percent in the post-period. We also observe similar
increasing patters in InitialReturn for All Other IPOs. In general, as in Bochkay et al. (2018), we
observe that InitialReturn is the highest for All Other IPOs, followed by Loss/Liquidity Disclosure
15
IPOs, GC Disclosure IPOs, and GC Opinion IPOs. However, the initial return patters in the post-
ASU 2014-15 period appear weaker than in the pre-period.
In Table 3, we show the mean and median of PriceRevision and InitialReturn across terciles
of Distress. As before, we present the summary statistics across categories of going concern and
also across pre- and post-ASU 2014-15 periods. In all terciles of Distress, we observe increasing
patterns in the frequency of GC Opinion, GC Disclosure, and Loss/Liquidity Disclosure in the
post-ASU 2014-15 period relative to the pre-period. However, the frequency increase for high
Distress IPOs is the highest. For example, the instances of GC Opinion for financially distressed
IPOs increase from 21.6 percent in the pre-ASU 2014-15 to 39.18 percent in the post period. This
evidence is consistent with auditors giving more going concern opinions to “borderline” IPOs in the
post-ASU 2014-15 period. Put differently, when management going concern disclosures became
mandated, managers have to assess going concern uncertainties and, if the substantial doubt exists,
make related footnote disclosures and discuss plans in place to address the problem. As such, the
disclosure mandate may restrict managers ability to negotiate a more favorable outcome with the
auditors (e.g., no going concern opinion, just disclosure), potentially leading to more GC Opinion
in the post-ASU 2014-15 period.
Taken together, our univariate results indicate that the frequency of management going concern
disclosures and auditor going concern opinions substantially increased following the FASB’s man-
date of ASU 2014-15. We also observe smaller differences in the IPO price revisions and initial
returns across going concern and non-going concern IPOs in the post-ASU 2014-15 (relative to
the pre-period), suggesting the informativeness of going concern signals likely declined. How-
ever, given that IPO characteristics are also different in the post-period, we conduct multivariate
analyses in Section IV.
16
IV. EMPIRICAL RESULTS
What Drives Changes in the Frequency of Going Concern Disclosures and Opinions?
Determinants Models of Going Concern Disclosures and Opinions
As discussed in Section III, the increase in the frequency of management going concern disclosures
and auditor going concern opinions in the post-ASU 2014-15 could be the outcome of riskier firms
going public or both managers and auditors becoming more conservative after the FASB’s mandate
of ASU 2014-15. To disentangle between these two potential explanations, we model managers’
choice to make a going concern disclosure and auditors’ choice to issue a going concern opinion in
the pre- and post-ASU 2014-15 periods. Specifically, we estimate the following model on samples
where GC Variable corresponds to either management going concern disclosure or auditor go-
ing concern opinion. To recognize that some management disclosures of going concern explicitly
mention the term “going concern,” while other disclosures state loss and liquidity issues, we com-
bine GC Disclosure and Loss/Liquidity Disclosure variables into one variable, Management GC
Disclosure. Management GC Disclosure is equal to 0 in the case of no management going concern
disclosure and no loss and/or liquidity problem disclosure, to 1 in the case of Loss/Liquidity Dis-
closure, and to 2 in the case of GC Disclosure. We note, however, that all our inferences remain
the same if we separately model management choice to disclose the term “going concern” or to
discuss loss and liquidity problems. Given that there are more than two categories in Management
GC Disclosure, we use ordered logistic regression to estimate our determinants model for man-
agement going concern disclosures. We use logistic regression with GC Opinion as the dependent
variable when we model auditors’ going concern opinions.
17
Our choice of determinants in Eq. (1) follows prior studies. Specifically, following Carson
et al. (2012), we identify covariates relevant to going concern issues: Distress; LnAge (the natural
logarithm of 1 plus the number of years from founding to IPO; Table 2 presents Age in years);
LnAssets (the natural logarithm of pre-IPO assets; Table 2 presents Assets in millions); and Debt-
Problem (equal to 1 if the prospectus references a debt default or covenant violation, and 0 oth-
erwise). In addition, we specify covariates from Leone et al. (2013): StartUp, UW, BigN, VC,
and CashBurn. In addition, As in Bochkay et al. (2018), we include SellShr0/1 since managers’
decision to voluntarily disclose bad news in the pre-ASU 2014-15 period is driven by their finan-
cial incentives. Several studies argue that managers voluntarily disclose bad information to reduce
the probability and expected costs of litigation (Skinner 1994; Kasznik and Lev 1995; Nelson and
Pritchard 2016). Therefore, we use LitigationRisk (the first principal component of litigation risk
measures in Francis et al. (1994) and Lowry and Shu (2002)) to proxy for the likelihood of litiga-
tion and RiskFactors (the length of the risk factors section in the prospectus) to proxy for overall
transaction risk.8
Table 4 reports the results of estimating Eq. (1) on samples of IPOs in the pre- and post-ASU
2014-15 periods. To better distinguish between the determinants of Management GC Disclosure
and GC Opinion, we exclude IPOs with auditor going concern opinions when we estimate the
determinants of management going concern disclosures, and vice versa. In Columns (1) and (2) of
Table 4, we find that managers make voluntary going concern disclosures in the pre-ASU 2014-15
period when their incentives to “cash out” are low (SellShr0/1 is negative and significant), when
litigation risk and overall transaction risks are high (LitigationRisk and RiskFactors are positive and
significant), when the probability of distress is high (Distress is positive and significant), when a
firm is small (StartUp is positive and significant; LnAssets is negative and significant), when a firm
“burns cash” fast (CashBurn is positive and significant).9 In contrast, in the post-ASU 2014-15
8To measure litigation risk, we adopt the methodology in Kim and Skinner (2012) who estimate securities litigationrisk for public companies. In our setting, we combine firm industry membership as in Francis et al. (1994) with theIPO-specific measure of litigation risk as in Lowry and Shu (2002).
9These results are consistent with findings in Bochkay et al. (2018) who study management voluntary disclosuresof going concern in the pre-ASU 2014-15 period.
18
period when management going concern disclosures become mandated, we find that the likelihood
of a going concern disclosure strongly increases with IPOs’ litigation risk, transaction risk, start-up
status, and the presence of a debt problem. Interestingly, marginal effects for LitigationRisk are
more than six times larger in the post-ASU 2014-15 period relative to the pre-period. Similarly,
DebtProblem is the strongest determinant of Management GC Disclosure (with the marginal effect
of 0.22) in the post-ASU 2014-15, while it was not significant in the pre-period.
In Columns (3) and (4) of Table 4, we observe similar changes in the determinants of GC
Opinion across the pre- and post-ASU 2014-15 periods. In the pre-ASU 2014-15 period, auditors
are more likely to issue a going concern opinion when litigation risk and overall transaction risks
are high (LitigationRisk and RiskFactors are positive and significant), when the probability of
distress is high (Distress is positive and significant), when a firm is small (LnAssets is negative and
significant), when a firm has a debt problem or “burns cash” fast (DebtProblem and CashBurn are
positive and significant). We also find that auditors are less likely to issue a going concern opinion
when managers have financial incentives to negotiate with auditors about the going concern status
(SellShr0/1 is negative and significant). In the post-ASU 2014-15 period, the likelihood of a going
concern opinion strongly increases with IPOs’ litigation risk, distress probability, and the presence
of a debt problem. As with Management GC Disclosure, we observe that DebtProblem is the
strongest determinant of GC Opinion (with the marginal effect of 0.21) in the post-ASU 2014-
15, while it is only marginally significant in the pre-period. Marginal effects for LitigationRisk
(Distress) are more than six (around two) times larger in the post-ASU 2014-15 period relative to
the pre-period.
Taken together, our results of estimating the determinants models of management going con-
cern disclosure and auditor going concern opinion suggest that both managers and auditors changed
the manner in which they assess going concern uncertainties in the post-ASU 2014-15 period. We
find that subsequent to the FASB’s mandate of going concern disclosures, both managers and audi-
tors seem to place greater emphasis on firms’ litigation risk and financial health when determining
a going concern problem.
19
Changes in Probabilities of Going Concern Disclosures and Opinions
We use the estimated coefficients in Columns (1) and (2) in Table 4 to predict the probabilities of
observing GC Disclosure and Loss/Liquidity Disclosure in the pre- and post-ASU 2014-15 peri-
ods, respectively. Similarly, we predict the probability of observing GC Opinion in the pre- and
post-periods using the the estimated coefficients in Columns (3) and (4) in Table 4. Next, we
compare the predicted probabilities in the pre- and post-periods to determine whether increases in
the likelihood of going concerns disclosures and opinions following ASU 2014-15 are due to (1)
changes in IPO characteristics (i.e., riskier firms go public in the post-ASU 2014-15 period), or due
to (2) changes in managers’ and auditors’ assessments of going concern (i.e., more conservative
assessment of going concern).
We denote the average predicted probability of observing management going concern disclo-
sure in the pre- and post-ASU 2014-15 periods as P (XPRE, β̂PRE) and P (XPOST , β̂POST ), re-
spectively. XPRE andXPOST denote IPO characteristics in the pre- and post- periods, respectively,
whereas β̂PRE and β̂POST denote the estimated pre- and post- coefficients of going concern models
(see Table 4). Then, the overall change in the probability of going concern disclosure across the
pre- and post-periods is:
∆P = P (XPOST , β̂POST ) − P (XPRE, β̂PRE) (2)
It is clear that ∆P in Eq. (2) could be driven by the differences between XPRE and XPOST or
by the differences between β̂PRE and β̂POST . To distinguish between these two possibilities , we
decompose ∆P into two components as follows:
∆P = P (XPOST , β̂POST ) − P (XPRE, β̂PRE) =
= [P (XPOST , β̂POST ) − P (XPOST , β̂PRE)] + [P (XPOST , β̂PRE) − P (XPRE, β̂PRE)],(3)
where P (XPOST , β̂PRE) denotes the average probability of management going concern disclosure
if coefficient estimates in the pre-period, β̂PRE , are applied to IPO characteristics in the post-
20
ASU 2014-15 period.10 Then, the first difference in Eq. (3) is the result of managers using a
different reporting strategy in the post-ASU 2014-15 period relative to the pre-period. The second
difference, on the other hand, is the result of differences in IPO characteristics between pre- and
post-ASU 2014-15 periods. We apply the same decomposition of probabilities as in Equations (2)
and (3) to measure changes in the probability of auditor going concern opinions across the pre-
and post-ASU 2014-15 periods.
Table 5 reports the results of applying Equations (2) and (3) to decompose the probabilities
of going concern signals. In Panel A, we find that the predicted probability of GC Disclosure
increases from 8.2 percent in the pre-ASU 2014-15 to 23.1 percent in the post-period. We also find
that this increase in probabilities can be fully explained by changes in the management reporting
strategy and not by the changes in IPO characteristics. In Panel B, we observe similar results when
we examine the predicted probabilities of Loss/Liquidity Disclosure. Specifically, we find that the
predicted probability of Loss/Liquidity Disclosure is 13.2 percent in the pre-ASU 2014-15 period
and increases to 27.8 percent in the post period. Similar to our results in Panel A, this change
in probability can be fully attributed to managers changing their reporting strategy, and not to
differences in IPO characteristics.
In Panel C, we report results for predicted probabilities of auditor going concern opinion. We
find that the predicted probability of GC Opinion increases from 9.1 percent in the pre-ASU 2014-
15 period to 33.3 percent in the post-period. As before, we find that this increase in the likelihood of
auditor going concern can be fully explained by changes in the auditors’ going concern assessment,
and not by changes in IPO characteristics. To provide further evidence on the changes in managers’
and auditors’ reporting strategies, in Panel D of Table 5, we tabulate our results across Distress
terciles. Interestingly, we find that managers and auditors of financially distressed and financially
healthy firms seem to change their going concern reporting strategies. For all Distress terciles, we
observe increased likelihood of management going concern disclosure and auditor going concern
opinion in the post-ASU 2014-15 period as compared to the pre-period.
10Francis and Krishnan (2002) use a similar method of decomposing probabilities to test the effect of The PrivateSecurities Litigation Reform Act of 1995 on auditors’ incentives to issue a going concern opinion.
21
Taken together, using different specifications to compare management going concern disclo-
sures and auditor going concern opinions in the pre- and post-ASU 2014-15 periods, we find
consistent evidence that the frequency of going concern signals increased because managers and
auditors became more conservative when assessing going concern uncertainties.
Relevance of Going Concern Signals for IPO Price Formation
Before the FASB’s mandate of ASU 2014-15, external auditors were the only party responsible
for evaluating a firm’s ability to continue as a going concern. Firm managers were making going
concern disclosures voluntarily. Several papers examine the relevance of going concern informa-
tion in IPO pricing. Willenborg and McKeown (2000) find that auditor going concern opinions
reduce IPO underpricing, consistent with auditors’ evaluations of going concern helping to reduce
information asymmetry. A recent study by Bochkay et al. (2018) finds that management voluntary
disclosures of going concern are incremental to auditor opinions - they are associated with nega-
tive price revisions during the book building process of an IPO and more efficient price discovery.
However, substantial increases in the frequency of going concern signals in the post-ASU 2014-15
period likely affect the informativeness of going concern information in IPO pricing. Therefore,
in this section, we examine how the relations between auditor going concern opinions, manage-
ment going concern disclosures, and IPO price formation change after the FASB’s mandate of
going concern disclosures. Given that our sample consists of 1,501 unique IPO firms in the pre-
and post-ASU 2014-15 periods, we cannot use a traditional difference-in-difference design (with
treatment and control groups observed in the pre- and post-periods) to test the impact of regulation
on the informativeness of going concern signals.11 Instead, we fix a going concern category, GC
Opinion, GC Disclosure, Loss/Liquidity Disclosure, All Other, and estimate the impact of ASU
2014-15 on IPO pricing within that sample. To remove the effect of changing IPO characteristics
relevant to IPO price revision and initial return, we first estimate the following models on the full
sample:
11Moreover, in the post-ASU 2014-15 period, there are 43 and 52 observations with GC Disclosure and GC Opinion,respectively, making it statistically infeasible to estimate meaningful relationships in a full difference-in-differencemodel with more than 40 covariates IPO price revision and initial returns models.
and then calculate the residual price revision (Residual Price Revision) and residual initial return
(Residual Initial Return).12 In this manner, we calculate IPO price revision and initial return that
are not explained by known determinants of these variables.
Next, we estimate the impact of ASU 2014-15 on IPO pricing by regressing Residual Price
Revision and Residual Initial Return on an indicator variable Post (equal to 1 for observations in
the post-ASU 2014-15 period, and 0 for observations in the pre-period) within each going concern
category. Stated formally, we estimate the following models:
Residual Price Revision =
β0 + β1 Post + ε, if GC Opinion = 1β0 + β1 Post + ε, if GC Disclosure = 1β0 + β1 Post + ε, if Loss/Liquidity Disclosure = 1β0 + β1 Post + ε, if All Other = 1
Residual Initial Return =
β0 + β1 Post + ε, if GC Opinion = 1β0 + β1 Post + ε, if GC Disclosure = 1β0 + β1 Post + ε, if Loss/Liquidity Disclosure = 1β0 + β1 Post + ε, if All Other = 1
Panels A in Table 6 reports the results for residual IPO price revision. For IPOs with going
concern opinions, we find that the average price revision is around 9.40 higher in the post-ASU
2014-15 period than in the pre-period. Further, we find that IPOs with GC Disclosure have around
12All variables and fixed effect specifications in Equations (4) and (5) are selected following prior literature (e.g.,Leone et al. (2013), Loughran and McDonald (2013), Willenborg et al. (2015), and Bochkay et al. (2018)).
23
4.73 higher price revision in the post-ASU 2014-15 period relative to the pre-period. For IPOs with
loss and liquidity disclosures, we find similar results, although they are not statistically significant.
Finally, for All Other IPOs, we find that the price revision is more negative in the post period, but
this result is not statistically significant. Collectively, these results suggest that the strong negative
association between going concern signals and IPO price revision documented in prior literature
(e.g., Willenborg and McKeown 2000; Bochkay et al. 2018) has weakened following the FASB’s
mandate of going concern disclosures. In other words, the increased frequency of management
going concern disclosures and auditor going concern opinions in the post-ASU 2014-15 period led
to lower information value of such signals regarding the offer price revision of book-built IPOs.
Panels B in Table 6 reports the results for residual initial returns. Consistent with our results
in Panel A, we find that the first day return is around 4 percent higher in the post-ASU 2014-15
period for GC Opinion IPOs. This result suggests that IPOs with auditor going concern opinions
suffer more first-day underpricing following the FASB’s mandate of going concern disclosures.
Put differently, this result implies that the prevalence of going concern opinions in the post-ASU
2014-15 period reduces the value of such information for uninformed investors.
In Panel B, we do not find significant results for going concern disclosure IPOs, i.e., there is
no change in initial returns for IPOs that disclose going concerns. However, given that there is a
strong positive relation between the price revision and initial returns, a phenomenon termed “par-
tial adjustment” (see Hanley (1993)), it is still possible that changes in informativeness of going
concern disclosures drive changes in initial returns indirectly through the price revision. To ex-
amine whether this is the case, we run a path analysis of the relation between GC Disclosure and
Residual Initial Return with Residual Price Revision as the mediating variable.13 The untabulated
results confirm a significant positive indirect effect of Post on Residual Initial Return (standard-
ized coefficient 0.05, z-statistic 2.57). As such, this result is consistent with our earlier findings
that going concern signals in the post-ASU 2014-15 period seem to lose their value relevance for
reducing information asymmetry when pricing IPOs.
13For the path analysis tests, we exclude PriceRevision and PriceRevision+ when calculating Residual Initial Re-turn.
24
V. CONCLUSION
In August 2014, the FASB issued the Accounting Standards Update No. 2014-15 that requires
managers to evaluate a company’s ability to continue as a going concern and, if substantial doubt
exists, provide related footnote disclosures and discuss plans in place to address the problem. Pre-
viously, such management disclosures were voluntary and only external auditors were required to
assess firms’ going concern status. In this paper, we examine the impact of the shift from volun-
tary to mandatory disclosure of going concern. We find that subsequent to the FASB’s mandate,
the frequency of management going concern disclosures and auditor going concern opinions more
than doubled. This sharp increase in going concern signals is due to changes in managers’ and
auditors’ reporting strategies, and not due to riskier firms going public. Specifically, we find that
under the new reporting regime, both managers and auditors raise more going concern concerns
among firms with financial problems and with high litigation risk. In terms of information con-
tent, we find that the prevalence of going concern signals following the FASB’s mandate weakens
the associations between going concern disclosures/opinions and IPO price revision and initial re-
turns. Collectively, our results are consistent with the going concern disclosure mandate having
significant consequences on the behavior of managers and auditors. The auditor going concern
opinion findings are especially surprising as the audit standards with respect to going concern did
not change.
25
Appendix A. Variable Definitions
Variable Definition
GC Opinion = 1 if the auditor’s opinion in the prospectus disclosing the initial range expresses substan-tial doubt regarding the registrant’s current ability to continue as a going concern, and 0otherwise.
GC Disclosure = 1 if GC Opinion is 0, but the prospectus disclosing the initial range contains the term“going concern” regarding the registrant’s current ability to continue, and 0 otherwise.
Loss/LiquidityDisclosure
= 1 if both GC Opinion and GC Disclosure are 0, but the prospectus disclosing the initialrange mentions loss and/or liquidity problems, and 0 otherwise.
All Other = 1 if all GC Opinion, GC Disclosure and Loss/Liquidity Disclosure are 0, and 0 otherwise.
PriceRevision = (IPO offer price - mid-point of initial range) ÷ mid-point of initial range, in percentage.
InitialReturn = (Closing price on the first day of trading - IPO offer price) ÷ IPO offer price, in percent-age.
PC1-LM = 1st principal component from a factor analysis using the Loughran and McDonald (2011)uncertain, weak modal and negative words in the prospectus disclosing the initial range,de-trented by IPO year.
PC2-LM = 2nd principal component from a factor analysis using the Loughran and McDonald (2011)uncertain, weak modal and negative words in the prospectus disclosing the initial range,de-trented by IPO year.
RiskFactors = (number of words in the Risk Factors section of the prospectus disclosing the initial range- average number of words in the Risk Factors section of the prospectus disclosing theinitial range for the issuer’s Fama-French 12 industry) ÷ standard deviation of the numberof words in the Risk Factors section of the prospectus disclosing the initial range for theissuer’s Fama-French 12 industry.
Distress = Probability of bankruptcy per Shumway (2001) update of Zmijewski (1984) coefficients.
StartUp = 1 if issuer’s annualized pre-IPO revenues are less than $1 million, and 0 otherwise.
OCF/Assets = Pre-IPO annualized operating cash flow per the most recent Statement of Cash Flows (inthe final prospectus) ÷ average assets, winsorized at the top and bottom 1%, in percentage.
IndustryReturn = Average return on all companies in CRSP in the issuer’s Fama-French 12 industry forthe period from the date of the prospectus disclosing the initial range to IPO date, inpercentage.
IPOReturn = Average initial return on IPOs between first prospectus date and IPO date, in percentage.
Retain-initial = 1 - (number of shares to be sold in the IPO ÷ number of post-IPO shares outstanding,from the prospectus disclosing the initial range), in percentage.
Retain-final = 1 - (number of shares to be sold in the IPO ÷ number of post-IPO shares outstanding,from the final prospectus), in percentage.
SellShr-initial = Number of shares to be sold by selling shareholders ÷ number of shares to be sold, fromthe prospectus disclosing the initial range, in percentage.
SellShr0/1 = 1 if SellShr-initial is greater than 0, and 0 otherwise.
SellShr-final = Number of shares to be sold by selling shareholders ÷ number of shares to be sold, fromthe final prospectus.
UW = Average rank of lead managers per Loughran and Ritter (2004) update of Carter etal. (1998).
(continued on the next page)
26
(continued from the previous page)
Variable Definition
BigN = 1 if issuer has a Big 5 or 4 audit firm, and 0 otherwise.
VC = 1 if issuer has venture capital backing (per SDC), and 0 otherwise.
Proceeds-initial = Proceeds from prospectus disclosing the initial range, excluding overallotment, in $mil-lions.
Proceeds-final = Proceeds from the final prospectus, excluding overallotment, in $millions.
NYSE/AMEX = 1 if an IPO lists on NYSE or AMEX, and 0 otherwise.
Carve = 1 if a carve-out IPO (per SDC), and 0 otherwise.
HighTech = 1 if issuer is a high technology company (per SDC), and 0 otherwise.
Age = Number of years from founding (or incorporation, if founding is unavailable) to IPO year.
Assets = Issuer’s pre-IPO total assets, in $millions.
LitRisk-FPS = Litigation risk per Francis et al. (1994), equal to 1 if the SIC is 2833-2836; 8731-8734(biotech), 3570-3577; 7370-7374 (computers), 3600-3674 (electronics) or 5200-5961 (re-tail), and 0 otherwise.
LitRisk-LS = IPO litigation risk per Lowry and Shu (2002) Table 4 “Deterrence effect” probit regressioncoefficients, normalized to range from 0.00 to 1.00.
LitRisk = 1st principal component from a factor analysis using LitRisk-FPS and LitRisk-LS litigationrisk measures.
DebtProblem = 1 if the prospectus disclosing the initial range references a debt payment default or acovenant violation, or whether such a default or violation is cured, and 0 otherwise.
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Stigler, G. J. 1964. “A theory of oligopoly.” Journal of political Economy 72 (1): 44–61.
Verrecchia, R. E. 1983. “Discretionary disclosure.” Journal of Accounting and Economics 5:179–194.
Wagenhofer, A. 1990. “Voluntary disclosure with a strategic opponent.” Journal of Accounting andEconomics 12 (4): 341–363.
30
Willenborg, M., and J. C. McKeown. 2000. “Going-concern initial public offerings.” Journal ofAccounting and Economics 30 (3): 279–313.
Willenborg, M., B. Wu, and Y. S. Yang. 2015. “Issuer operating performance and IPO price for-mation.” Journal of Accounting Research 53 (5): 1109–1149.
Zmijewski, M. E. 1984. “Methodological issues related to the estimation of financial distress pre-diction models.” Journal of Accounting Research: 59–82.
31
TABLES
TABLE 1Sample Description
Panel A: Sample
Firm commitment IPOs by domestic companies January 1, 2001 to September 30, 2019 (SDC) 3,030
Less: Financial registrants (SIC 6xxxx) 1,189Unit IPOs (includes ADS) 226Necessary financial statement information not available 77Issued via auction mechanism 15Initial price range mid-point ≤ $5.00 15Days from initial price range date to IPO date exceed 365 7
Full Sample 1,501
Panel B: Sample – by time period and opinion / disclosure type
All Other 766 (72.3%) 100 (50.5%) 94 (38.7%) 960 (64.0%)
Total 1,060 (100.0%) 198 (100.0%) 243 (100.0%) 1,501 (100.0%)
Panel A of this table summarizes the sample selection process. Panel B reports the number and proportion (in paren-theses) of observations in our sample for (1) different time periods relative to the ASU 2014-15 (pre-, transition, andpost-) and (2) different groups of going concern uncertainties (auditor going concern opinions, management disclo-sures of going concern, management disclosures of loss and/or liquidity problems, and all other IPOs with no goingconcern uncertainties).
32
TAB
LE
2D
escr
iptiv
eSt
atis
ticsb
yTi
me
Peri
odan
dG
oing
Con
cern
Opi
nion
/Dis
clos
ure
Type
Pre-
FASB
ASU
2014
-15
Post
-FA
SBA
SU20
14-1
5
Loss
esor
Loss
esor
GC
GC
Dis
clos
ure
Liqu
idity
All
Tota
lG
CG
CD
iscl
osur
eLi
quid
ityA
llTo
tal
Opi
nion
FN
Non
-FN
Dis
clos
ure
Oth
erO
pini
onF
NN
on-F
ND
iscl
osur
eO
ther
Vari
able
n=77
n=50
n=34
n=13
3n=
766
n=1,
060
n=47
n=46
n=1
n=55
n=94
n=24
37.
26%
4.72
%3.
21%
12.5
5%72
.26%
100.
00%
19.3
4%18
.93%
0.41
%22
.63%
38.6
8%10
0.00
%
Pri
ceR
evis
ion
−26.40
−12.85
−16.61
−7.82
−1.27
−4.96
−6.28
−3.41
23.53
3.51
3.94
0.55
(−26.67)
(−12.66)
(−8.71)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(23.53)
(0.00)
(6.67)
(0.00)
Initi
alR
etur
n3.42
10.26
9.05
17.54
16.44
15.11
14.59
13.38
52.62
24.96
25.31
21.01
(0.00)
(3.60)
(4.84)
(10.33)
(11.77)
(9.54)
(1.60)
(5.92)
(52.62)
(19.23)
(20.95)
(15.00)
PC
1-LM
0.84
0.73
0.52
0.63
−0.24
0.02
1.12
0.69
−1.22
0.66
−0.77
0.19
(0.93)
(0.89)
(0.28)
(0.64)
(−0.39)
(−0.05)
(1.08)
(0.83)
(−1.22)
(0.85)
(−0.65)
(0.22)
PC
2-LM
0.21
0.01
−0.06
0.03
0.19
0.15
−0.28
−0.27
−0.06
−0.37
−0.04
−0.21
(0.20)
(0.04)
(−0.07)
(0.01)
(0.17)
(0.13)
(−0.25)
(−0.37)
(−0.06)
(−0.38)
(−0.20)
(−0.26)
Ris
kFac
tors
0.29
0.34
0.07
0.13
−0.16
−0.06
1.10
0.79
−1.31
0.77
−0.61
0.29
(0.18)
(0.29)
(0.01)
(0.13)
(−0.19)
(−0.09)
(1.04)
(1.04)
(−1.31)
(0.91)
(−0.70)
(0.17)
Dis
tres
s0.86
0.47
0.38
0.45
0.19
0.29
0.75
0.31
0.05
0.33
0.23
0.37
(1.00)
(0.29)
(0.27)
(0.38)
(0.10)
(0.14)
(0.94)
(0.18)
(0.05)
(0.13)
(0.13)
(0.22)
Star
tUp
0.51
0.28
0.29
0.27
0.02
0.11
0.57
0.52
0.00
0.44
0.01
0.31
(1.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(1.00)
(1.00)
(0.00)
(0.00)
(0.00)
(0.00)
OC
F/A
sset
s−112.44
−54.09
−29.83
−36.42
5.23
−12.47
−102.59
−35.45
11.32
−38.97
0.10
−35.29
(−89.18)
(−48.30)
(−28.11)
(−36.71)
(7.04)
(2.68)
(−82.65)
(−38.73)
(11.32)
(−27.77)
(3.50)
(−24.40)
Indu
stry
Ret
urn
2.34
1.40
1.44
0.93
1.42
1.43
−0.17
4.91
4.59
1.20
0.13
1.24
(2.20)
(0.28)
(0.83)
(0.74)
(1.15)
(1.14)
(0.23)
(−0.03)
(4.59)
(1.39)
(0.35)
(0.34)
IPO
Ret
urn
15.89
16.11
13.23
15.59
13.15
13.80
20.66
25.61
17.25
21.68
23.97
23.09
(14.35)
(14.78)
(12.02)
(12.94)
(11.74)
(12.13)
(20.64)
(22.55)
(17.25)
(21.92)
(22.38)
(22.20)
Ret
ain-
final
65.64
73.84
70.98
73.81
71.79
71.67
73.89
76.91
90.45
79.14
80.76
78.38
(67.23)
(72.87)
(71.92)
(74.24)
(74.58)
(73.75)
(75.39)
(78.24)
(90.45)
(79.68)
(83.33)
(79.48)
SellS
hr-i
nitia
l0.21
1.83
12.82
3.89
19.63
15.19
0.00
1.65
0.00
1.25
13.87
5.96
(0.00)
(0.00)
(0.00)
(0.00)
(3.61)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
UW
6.48
7.52
7.89
7.95
8.14
7.96
6.70
7.60
8.25
7.80
8.18
7.70
(7.00)
(8.09)
(8.12)
(8.50)
(8.50)
(8.50)
(7.50)
(7.82)
(8.25)
(8.00)
(8.50)
(8.17)
Big
N0.77
0.88
0.94
0.86
0.87
0.86
0.79
0.78
1.00
0.87
0.84
0.83
(con
tinue
don
the
next
page
)
33
(con
tinue
dfr
omth
epr
evio
uspa
ge)
Pre-
FASB
ASU
2014
-15
Post
-FA
SBA
SU20
14-1
5
Loss
esor
Loss
esor
GC
GC
Dis
clos
ure
Liqu
idity
All
Tota
lG
CG
CD
iscl
osur
eLi
quid
ityA
llTo
tal
Opi
nion
FN
Non
-FN
Dis
clos
ure
Oth
erO
pini
onF
NN
on-F
ND
iscl
osur
eO
ther
Vari
able
n=77
n=50
n=34
n=13
3n=
766
n=1,
060
n=47
n=46
n=1
n=55
n=94
n=24
37.
26%
4.72
%3.
21%
12.5
5%72
.26%
100.
00%
19.3
4%18
.93%
0.41
%22
.63%
38.6
8%10
0.00
%
(1.00)
(1.00)
(1.00)
(1.00)
(1.00)
(1.00)
(1.00)
(1.00)
(1.00)
(1.00)
(1.00)
(1.00)
VC
0.81
0.84
0.65
0.85
0.44
0.54
0.64
0.72
0.00
0.80
0.43
0.60
(1.00)
(1.00)
(1.00)
(1.00)
(0.00)
(1.00)
(1.00)
(1.00)
(0.00)
(1.00)
(0.00)
(1.00)
Pro
ceed
s-in
itial
62.53
115.85
137.71
86.61
236.82
196.43
72.61
124.32
150.00
165.06
484.90
263.13
(63.75)
(75.00)
(75.00)
(75.00)
(110.00)
(90.01)
(75.00)
(93.00)
(150.00)
(100.00)
(206.84)
(100.50)
NYS
E/A
ME
X0.06
0.06
0.32
0.11
0.40
0.32
0.04
0.13
0.00
0.18
0.52
0.28
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(1.00)
(0.00)
Car
ve0.03
0.10
0.06
0.05
0.11
0.09
0.13
0.11
0.00
0.05
0.13
0.11
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
Hig
hTec
h0.04
0.08
0.18
0.27
0.30
0.27
0.06
0.07
0.00
0.25
0.38
0.23
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
Age
9.57
12.44
20.91
10.32
23.58
20.29
8.77
12.00
17.99
9.75
24.14
15.58
(8.00)
(9.00)
(9.00)
(9.00)
(13.00)
(11.00)
(7.00)
(8.50)
(17.99)
(9.00)
(13.00)
(10.00)
Ass
ets
25.56
139.12
305.42
71.28
885.26
666.89
52.98
216.39
831.17
250.21
1527.34
702.09
(14.82)
(41.77)
(44.58)
(43.55)
(156.42)
(91.05)
(31.16)
(78.98)
(831.17)
(92.68)
(391.98)
(116.60)
LitR
isk-
FP
S0.78
0.68
0.68
0.64
0.42
0.49
0.79
0.76
1.00
0.84
0.47
0.67
(1.00)
(1.00)
(1.00)
(1.00)
(0.00)
(0.00)
(1.00)
(1.00)
(1.00)
(1.00)
(0.00)
(1.00)
LitR
isk-
LS0.38
0.42
0.43
0.42
0.48
0.46
0.40
0.44
0.66
0.48
0.61
0.51
(0.38)
(0.40)
(0.40)
(0.41)
(0.43)
(0.42)
(0.40)
(0.41)
(0.66)
(0.44)
(0.57)
(0.44)
LitR
isk
0.82
0.47
0.41
0.42
−0.22
−0.01
0.73
0.47
−0.40
0.34
−0.89
−0.04
(1.14)
(0.99)
(1.00)
(0.85)
(−0.38)
(−0.27)
(1.02)
(0.90)
(−0.40)
(0.71)
(−0.76)
(0.14)
Deb
tPro
blem
0.14
0.06
0.12
0.13
0.10
0.10
0.13
0.13
0.00
0.04
0.06
0.08
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
Cas
hBur
n0.23
0.14
0.13
0.17
0.07
0.10
0.32
0.31
−0.10
0.17
0.10
0.20
(0.21)
(0.14)
(0.15)
(0.15)
(0.02)
(0.06)
(0.26)
(0.24)
(−0.10)
(0.18)
(0.03)
(0.18)
Thi
sta
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nan
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edia
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SU20
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aint
ies
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,man
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.
34
TAB
LE
3D
escr
iptiv
eSt
atis
ticso
fPri
ceR
evis
ion
and
Initi
alR
etur
nby
Goi
ngC
once
rnO
pini
on/D
iscl
osur
eTy
pean
dTe
rcile
ofD
istr
ess
Pre-
FASB
ASU
2014
-15
Post
-FA
SBA
SU20
14-1
5
Loss
esor
Loss
esor
GC
GC
Dis
clos
ure
Liqu
idity
All
Tota
lG
CG
CD
iscl
osur
eLi
quid
ityA
llTo
tal
Opi
nion
FN
Non
-FN
Dis
clos
ure
Oth
erO
pini
onF
NN
on-F
ND
iscl
osur
eO
ther
Low
Dis
tres
sn=
1n=
14n=
5n=
26n=
336
n=38
2n=
2n=
16n=
1n=
23n=
33n=
750.
26%
3.66
%1.
31%
6.81
%87
.96%
100%
2.67
%21
.33%
1.33
%30
.67%
44%
100%
Pri
ceR
evis
ion
−61.54
−10.70
−23.46
−1.87
0.78
−0.30
−7.97
−0.93
23.53
3.70
0.15
1.10
(−61.54)
(−11.86)
(−25.00)
(0.00)
(3.33)
(0.00)
(−7.97)
(2.94)
(23.53)
(0.00)
(2.13)
(0.00)
Initi
alR
etur
n7.40
10.72
5.15
23.16
17.72
17.64
4.97
15.49
52.62
19.88
31.49
24.09
(7.40)
(6.89)
(0.27)
(8.97)
(13.00)
(12.29)
(4.97)
(5.81)
(52.62)
(16.67)
(27.05)
(16.62)
Med
.Dis
tres
sn=
6n=
12n=
13n=
36n=
287
n=35
4n=
7n=
14n=
0n=
10n=
40n=
711.
69%
3.39
%3.
67%
10.1
7%81
.07%
100%
9.86
%19
.72%
0%14
.08%
56.3
4%10
0%P
rice
Rev
isio
n−29.10
−11.02
−6.40
−4.20
−2.93
−3.91
0.27
−3.20
−1.59
1.46
0.44
(−24.00)
(−12.50)
(−6.25)
(7.14)
(0.00)
(0.00)
(0.00)
(−2.38)
−(0.00)
(5.00)
(0.00)
Initi
alR
etur
n−1.11
14.18
10.91
22.44
14.46
14.87
7.51
13.47
−12.36
15.68
13.97
(0.00)
(3.20)
(8.33)
(17.45)
(10.53)
(10.00)
(0.00)
(4.96)
−(15.44)
(7.46)
(7.00)
Hig
hD
istr
ess
n=70
n=24
n=16
n=71
n=14
3n=
324
n=38
n=16
n=0
n=22
n=21
n=97
21.6
0%7.
41%
4.94
%21
.91%
44.1
4%10
0%39
.18%
16.4
9%0%
22.6
8%21
.65%
100%
Pri
ceR
evis
ion
−25.67
−15.03
−22.76
−11.84
−2.75
−11.59
−7.40
−6.08
−4.18
14.60
0.20
(−24.87)
(−13.81)
(−22.38)
(−7.69)
(0.00)
(−7.69)
(−5.88)
(0.00)
−(1.22)
(13.33)
(0.00)
Initi
alR
etur
n3.76
8.05
8.75
12.99
17.43
12.38
16.40
11.18
−36.01
33.95
23.79
(0.00)
(4.59)
(4.72)
(9.14)
(10.73)
(5.68)
(1.80)
(20.88)
−(33.76)
(33.62)
(24.50)
Tota
ln=
77n=
50n=
34n=
133
n=76
6n=
1,06
0n=
47n=
46n=
1n=
55n=
94n=
243
7.26
%4.
72%
3.21
%12
.55%
72.2
6%10
0%19
.34%
18.9
3%0.
41%
22.6
3%38
.68%
100%
Pri
ceR
evis
ion
−26.40
−12.85
−16.61
−7.82
−1.27
−4.96
−6.28
−3.41
23.53
3.51
3.94
0.55
(−26.67)
(−12.66)
(−8.71)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(23.53)
(0.00)
(6.67)
(0.00)
Initi
alR
etur
n3.42
10.26
9.05
17.54
16.44
15.11
14.59
13.38
52.62
24.96
25.31
21.01
(0.00)
(3.60)
(4.84)
(10.33)
(11.77)
(9.54)
(1.60)
(5.92)
(52.62)
(19.23)
(20.95)
(15.00)
Thi
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Rev
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Ret
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35
TABLE 4Determinants of Going Concern Disclosures and Opinions.
Management GC Disclosure Auditor GC OpinionPre Post Pre Post(1) (2) (3) (4)
Observations 983 196 843 141Pseudo R2 22.12% 26.72% 75.32% 79.37%t statistics in parentheses, average marginal effects in square bracketsc p < 0.10, b p < 0.05, a p < 0.01
This table reports the estimated coefficients from determinants models of management going concern disclosuresin the pre- and post-ASU 2014-15 periods (Columns (1) and (2)) and auditor going concern opinions in the pre-and post-ASU 2014-15 periods (Columns (3) and (4)). In Columns (1) and (2), the dependent variable is equal to0 if management does not disclose going concern (i.e., Loss/Liquidity Disclosure = 0 and GC Disclosure = 0), 1if management discloses loss and/or liquidity problems (i.e., Loss/Liquidity Disclosure = 1), and 2 if managementdiscloses a going concern problem (i.e., GC Disclosure = 1). Regressions in Columns (1) and (2) are estimated usingordered logistic regressions on a sample of IPO observations with no auditor going concern opinion (i.e., GC Opinion =0). Numbers in square brackets indicate average marginal effects of independent variables on GC Disclosure outcome.In Columns (3) and (4), GC Opinion is the dependent variable. Regressions in Columns (3) and (4) are estimated usinglogistic regression on a sample of IPO observations with no management disclosure of going concern uncertainties(i.e., Loss/Liquidity Disclosure = 0 and GC Disclosure = 0). Numbers in square brackets indicate average marginaleffects of independent variables on GC Opinion outcome. Year fixed effects are included in all regressions, but are notreported. Reported statistics are based on standard errors clustered at the FF12 industry level. All variables are definedin Appendix A. 36
TABLE 5Differences in Estimated Probabilities of Going Concern Opinion and Disclosure, Pre- and
P (XPRE, β̂PRE) P (XPOST, β̂POST)Overall Change 0.091 0.333 0.241a
(843) (141) [6.52]
P (XPOST, β̂PRE) P (XPOST, β̂POST)Change Due to Auditor Reporting Strategy 0.099 0.333 0.233a
(141) (141) [5.71]
P (XPRE, β̂PRE) P (XPOST, β̂PRE)Change Due to IPO Characteristics 0.091 0.099 0.008
(843) (141) [0.42]
t statistics in square brackets, number of observations in parenthesesc p < 0.10, b p < 0.05, a p < 0.01
37
Panel D: Changes in Going Concern Disclosure and Opinion Reporting Strategies, by terciles of IPO Distress.
Distress Tercile N P (XPRE, β̂PRE) P (XPOST, β̂POST)
(1) (2) (2) – (1)
Management GoingConcern Disclosure
Low 73 0.054 0.240 0.185a
[6.62]Medium 64 0.037 0.160 0.123a
[4.58]High 59 0.127 0.299 0.172a
[6.37]
Total 196
Management Loss orLiquidity Disclosure
Low 73 0.115 0.278 0.162a
[7.60]Medium 64 0.076 0.237 0.160a
[7.35]High 59 0.188 0.323 0.134a
[6.17]
Total 196
Auditor Going ConcernOpinion
Low 35 0.001 0.070 0.069c
[1.84]Medium 47 0.004 0.128 0.124a
[2.94]High 59 0.234 0.652 0.417a
[6.37]
Total 141t statistics in square brackets, number of observations in parenthesesc p < 0.10, b p < 0.05, a p < 0.01
This table reports changes in likelihoods of different types of going concern uncertainties in the pre-ASU 2014-15 andpost-ASU 2014-15 periods as per regression models in Equation (1) and their coefficient estimates in Table 4. For agiven type of going concern (GC) uncertainty, the table reports: (1) the Overall Change in the likelihood from the pre-to post-period calculated as the difference in the average likelihood of reporting GC uncertainty in the post period,P (XPOST , β̂POST ), and the average likelihood of reporting GC uncertainty in the pre period, P (XPRE , β̂PRE); (2)the change in the likelihood due to changes in management/auditor Reporting Strategy calculated as the differencebetween the average likelihood of reporting GC uncertainty in the post period as estimated using the post-period GCmodel, P (XPOST , β̂POST ), and the average likelihood of reporting GC uncertainty in the post period as estimatedusing the pre-period GC model, P (XPOST , β̂PRE); and (3) the change in likelihood due to change in IPO Charac-teristics calculated as the difference between the average likelihood of reporting GC uncertainty in the pre-period asestimated using the pre-period GC model, P (XPRE , β̂PRE), and the average likelihood of reporting GC uncertaintyin the post period as estimated using the pre-period GC model, P (XPOST , β̂PRE). Panel A reports changes in likeli-hoods of management going concern disclosures. Panel B reports changes in likelihoods of management disclosuresof loss and/or liquidity problems. Panel C reports changes in likelihoods of auditor going concern opinions. Finally,Panel D reports changes in likelihoods due to changes in management/auditor reporting strategy for all three types ofgoing concern uncertainties across terciles of Distress variable. Number of observations used to calculate the aver-age likelihood in each category are reported in parentheses. Numbers in square brackets correspond to t- statistics oftwo-tailed t tests for differences in average likelihoods.
38
TABLE 6Changes in IPO Price Revision and Initial Returns across the Pre- and Post-ASU 2014-15
Periods
Panel A: Changes in IPO Price Revision
Auditor GCO Management Disclosure Sample All Other IPOsSample GC Disclosure Loss/Liquidity Disclosure Sample
(1) (2) (3) (4)
Post 9.40b 4.73c 4.18 −4.03(2.53) (2.30) (1.61) (−1.23)
Observations 124 131 188 860R2 1.07% 0.19% 0.01% 0.01%t statistics in parenthesesc p < 0.10, b p < 0.05, a p < 0.01
This table reports the estimated coefficients of OLS regressions of ResidualPriceRevision (Panel A) and ResidualIni-tialReturn (Panel B) on the indicator of post-ASU 2014-15 period (Post) for different going concern uncertaintysamples. ResidualPriceRevision and ResidualInitialReturn are calculated using OLS regression models as defined inEquations (4) and (5), respectively. Variable Post is equal to 1 for observations in the post-ASU 2014-15 period, and 0for observations in the pre-period. Column (1) only includes observations with GC Opinion = 1. Column (2) only in-cludes observations with GC Disclosure = 1. Column (3) only includes observations with Loss/Liquidity Disclosure =1. Finally, Column (4) only includes observations with no going concern uncertainties, i.e., All Other IPOs. Reportedstatistics are based on standard errors clustered at the FF12 industry level.
