Journal of Accounting and Economics 8 (1986) 93-117.

North-Holland

ABNORMAL STOCK RETURNS ASSOCIATED WITH MEDIA

DISCLOSURES OF SUBJECI- TO QUALIFIED AUDIT
OPINIONS*

Nicholas DOPUCH
Washington University, St. LOUIS, MO 63130, USA

Robert W. HOLTHAUSEN and Richard W. LEFTWICH

UniversiQ~ of Chicago, Chmgo, IL 60637, USA

Received August 1985, final version received January 1986

This paper contains evidence of a significant negative stock price reaction to media disclosures of
subject to qualified audit opinions. Disclosures of qualifications in the financial news media (the
Wd Sweet Journui and the Broud Tape) are rare relative to the frequency of audit qualifications.
Other studies do not detect an impact of qualified opinions on stock prices. None of the
explanations for the difference in the results between this study and prior studies is consistent with
the data. We are unable to draw strong inferences because we cannot identify the selection process
that produces the sample of media disclosures.

1. Introduction

This paper documents negative abnormal stock returns associated with

media disclosures of subject to qualified audit opinions. During the three-day
event period, the average abnormal return for the sample of 109 observations is
-4.7%, which is reliably less than zero. Moreover, the magnitude of the
abnormal returns does not depend on whether the firm received a similar
qualification in the previous year.
The results in this paper are in marked contrast to the findings of previous
studies which employ larger samples, but do not detect a stock price response
to disclosures of qualified audit opinions [e.g., Davis (1982) Dodd, Dopuch,
Holthausen and Leftwich (1984), and Elliott (1982)l.l Five potential explana-
tions for the different results are explored in this paper. None of the explana-

*The authors wish to thank John Hand for his dedicated work as a research assistant. In
addition, we thank George Foster, Dave Larcker. Jim Patell, Peggy Wier, Mark Wolfson, Jerry
Zimmerman, Mark Zmijewski. and the participants of workshops at Northwestern, Stanford and
Yale for their comments and suggestions. Financial support from the Peat, Marwick. Mitchell
Foundation and the Institute of Professional Accounting at the Graduate School of Business of the
University of Chicago is gratefully acknowledged.
Elliott (1982) detects significant abnormal performance of -4.8% over a two-day announce-
ment window for fourteen firms with qualification announcements in the WaN Street Journal.
Thus, our results are consistent with this portion of Elliots study.
94 N. Dopuch et al., Abnormal returns associated with quahjied audit opinions

tions satisfactorily resolves the conflict between this paper and previous
studies: the difference in results is not due solely to simultaneous news
announcements at the time of a media announcement of a. qualification; the
measured abnormal returns in this paper represent more than movement
between unchanged bid and ask prices; qualifications announced in the media
are no less anticipated nor do they relate to more severe contingencies than
qualifications that do not receive media attention; media announcements do
not produce more precise event dates than those employed in other studies;
and media disclosure does not constitute wider dissemination of the qualifica-
tion relative to filing of 10-Ks and annual reports.
The results in this paper call into question the argument that qualified
opinions have no effect on stock prices. Auditors and their clients act as if
qualified opinions either impose costs on clients receiving those opinions, or as
if qualified opinions provide negative information about the clients. Our results
are consistent with that behavior of auditors and clients, at least for the subset
of qualified opinions that attracts attention in the financial press. Stronger
inferences are not justified because we are unable to identify the selection
process that produces the observations in the sample of media disclosures.
Outline of the paper: Section 2 discusses the data collection procedures.
Evidence of abnormal performance for the sample is presented in section 3.
Potential explanations for the difference in results between this paper and
previous papers are tested (and rejected) in section 4. Section 5 contains a
summary and conclusions.

2. Data

2.1. Sample of media disclosures of audit qualiJications

The sample consists of 114 media disclosures of subject to qualified audit

opinions. We designate 75 of those observations as first-time, or initial,
qualifications, because the firm received a clean (unqualified) opinion in the
previous year. The other 39 observations are designated as subsequent qualifi-
cations because the firm received a qualified opinion in the previous year, often
due to a similar contingency. Throughout the paper, we use the term qualified
to refer to subject to qualifications arising from contingencies. Qualifications
for a consistency exception (i.e., an accounting principle change) are treated as
unqualified, or clean, opinions.

The following procedures yielded the sample of 114 observations:

(i) We searched for stories about qualifications in the Wall Street Journal
Index for a sample of 700 New York Stock Exchange (NYSE) and
American Stock Exchange (ASE) firms that received first-time qualifica-
tions during 1970-1979. The sample of 700 firms with first-time qualifica-
 N. Dopuch et al., Abnormal returns arsociuted wrth qualijied audit opinions 9s

tions was obtained from the Disclosure Zndex from May 1973 through
April 1976, and from the National Automated Accounting Research System
from 1976 through 1980. For each firm listed as having a qualified opinion
(except a consistency opinion), we confirmed that the opinion was qualified
by examining the 10-K. If it was qualified, we searched previous years
until an unqualified opinion was found. We did not search prior to 1969.
[See Dodd, Dopuch, Holthausen and Leftwich (1984) for further details.]
(ii) To avoid complete reliance on the Wall Street Journal Index, we read all
of the indexed stories published from three months prior to the fiscal year
end of the qualification until nine months after the fiscal year end for a
subset of 250 of those firms that received first-time qualifications in 1973
and 1974. This procedure was not used on the entire sample because it
yielded so few additional observations.
(iii) We searched the Dow Jones News Service, a computerized data base that
includes the Dow Jones Broad Tape, the Wall Street Journal, and Barrons
for stories about 86 firms that received first-time qualifications and could
have announced them between January 1979 and July 1980.
(iv) We read the Wall Street Journal Index for each of the Big 8 accounting
firms for the period 1970-1980, searching for stories about qualifications.
(v) We conducted a key word search of the Dow Jones News Service for
words such as qualification, qualified, audit report, and contingency
for the period January 1979 to December 1982.

The search procedure produces announcements concentrated in the latter

portion of the 1970-1982 period. Only 20 announcements are found before
1977. Of 94 post-1976 announcements, 48 came from the 1981-1982 period.

2.2. Timing of disclosures

To identify the timing of the media disclosure relative to the announcement

rule used in other studies, we collected the following dates for each of the 114
observations in the media disclosure sample:

(i) The fiscal year end, taken from the microfiche copy of the 10-K.
(ii) The date that the SEC received the 10-K (the receipt date stamped by the
SEC), obtained from the microfiche copy of the 10-K.
(iii) The date that the SEC received the annual report (the receipt date
stamped by the SEC). These dates are frequently unavailable because
firms are not required to send separate copies of the annual report to the
SEC.

2Steps (i) to (iii) yielded 43 stories from a sample of 786. We conclude that media disclosure of
qualifications is a rare event. Casual observation suggests that the incidence of reporting has
increased in recent years.
96 N. Dopuch et ul.. Abnormal returns assocrated with quahjied audit opinions

2.3. Simultaneous information releases

We classified each observation in the disclosure sample as either con-

taminated or non-contaminated depending on whether we could discover
additional information about the firm released around the time of the media
disclosure of the qualification.
To be classified as non-contaminated, an observation must satisfy three
conditions. First, there must be no other story in the Wall Street Journal Index
within the five trading days (-2 to + 2) of the media announcement of the
qualification (day 0). Second, for all observations disclosed subsequent to
January 1, 1979, there must be no Broad Tape story during the same five
trading days. Third, the story about the qualification must contain no informa-
tion other than a paraphrase of the auditors report, or a restatement of
information that we could determine was already publicly available. For
example, observations are classified as contaminated if an earnings number,
mentioned in the qualification story, did not agree with the earnings number
reported previously in the Wall Street Journal Index or on the Broad Tape. If
earnings had not been previously reported, the observation is classified as
contaminated if the media disclosure includes an earnings number.

An example of a story classified as non-contaminated follows:

Carolina Power and Light Co.s independent auditor qualified the utilitys
1978 financial statements because of uncertainty about whether it can
recover $12.2 million that was spent planning and engineering two nuclear
power plants. In January (emphasis added), the utility canceled plans to
build the plants and said it would ask state regulators to allow $12.2
million in costs to be charged to customers over five years. In qualifying
the statements, Deloitte, Haskins and Sells said Carolina Power hadnt
provided for any losses that may result if the request is denied. (Wall
Street Journal, March 13, 1979)

Table 1 contains a summary of the contaminated and non-contaminated

observations in the sample. There are 59 (51.8%) contaminated observations
among the 114 observations and 43 (57.3%) of the 75 first-time qualifications
are contaminated.

3. Evidence of abnormal performance

3.1. Measurement of abnormal returns

The stock price impact of media announcements of qualified audit opinions

is estimated using prediction errors from the market model.3 The daily

jSee Fama (1976) for a discussion of the market model.

 N. Dopuch et al., Abnormal returns associated with qualified audit opinions 91

Table 1
Composition of the sample of 114 media disclosures of qualified audit opinions from 1970-1982
(number and percentage of observations, going concern qualifications in parentheses).

Type of qualification
First-time Subsequent Total

(#) (S) (#) (%) (#) (8)

Contaminatedh 43 57.3 16 41.0 59 518

(12) (5) (17)
Non-contaminated 32 42.7 23 59.0 55 48.2
(5) (3) (8)
Total 75 100.0 39 100.0 114 100.0
(17) (8) (25)

The qualification is first-time if the firm received a clean (unqualified) opinion in the previous
year. The qualification is subsequent if the firm received a qualification in the previous year.
Observations are classified as contaminated if there is a story about the firm other than the
qualification story in the Wall Street Journal Index within five trading days (- 2 to + 2) of the
media announcement (day 0); if the story about the qualification contains information other than
a restatement of publicly available information; and, for observations disclosed subsequent to
January 1, 1979, if there is a Broad Tape story within five trading days ( ~ 2 to + 2) of the media
announcement. All other observations are classified as non-contaminated.

prediction error, PE,,, for each sample firm i on each event day t during the
period of interest is estimated as

PE,,= R,, - (4 + bL,,)~

where

R,, = continuously compounded rate of return on the common stock of firm

i on event day t;
R I?*, =
- continuously compounded rate of return on the equally weighted
New York and American Stock Exchange index on event day t;4
4, P, = ordinary least squares estimates of market model parameters. The
parameters are estimated over the 300 trading days, day +61 to day
-t 360 (when available), defined relative to the announcement date.5 If
there are fewer than 100 daily returns available in this period,
available observations from the period are combined with returns

The results are not sensitive to the choice between the equally weighted and the value-weighted
index.
5The results are not sensitive to the choice between ordinary least squares estimates of the
market model parameters and Scholes and Williams (1977) estimates.
 98 N. Dopuch et al., Abnormal returns associated with qualijed audit opinions

available from the 300 trading day period, day - 600 to day - 301. A
minimum of 100 returns from the combined period is required for
inclusion.6

The prediction errors, PE;,, are averaged across the N, firms in the sample
on each event day t to form an average prediction error, APE,, where

APE, = (l/N,) 5 PE,,.

i=l

An estimate of the variance of this series, &jPE, is calculated for the 100 trading
days from day + 61 through day + 160 as
+160
A2
u,,, = (i/99) C (APE, -APE)*,
I= +61

where APE is the mean of the average prediction errors for the 100 trading
days. The average prediction errors are cumulated from day - 300 to form
cumulative average prediction errors (CPE). The average prediction errors are
also cumulated over subperiods of k days from t through t + k to form
window average prediction errors (WAPE,, r+k), where
t+k
WAPE,.,,, = 1 APE,.
7=1

The r-statistic testing whether a window average prediction error is signifi-

cantly different from zero is based on the time series variance of portfolio
average prediction errors for the 100 days from day + 61 to day + 160:

t = WAPE,.,+,/&%,,,.

This statistic has a t-distribution with 99 degrees of freedom if the average

prediction errors, the APE,, are normal and independently distributed through
time. The t-statistic incorporates any cross-sectional dependence in the daily
prediction errors.

6Results over short intervals, such as the windows immediately around the event period, are not
sensitive to the choice of the estimation period or the use of alternative specifications such as
returns or returns minus the market. Estimates over longer periods, such as sixty or more trading
days, are sensitive to the choice of the estimation period. The estimation period selected is the most
appropriate because firms are likely to experience negative abnormal returns in the fiscal year for
which the qualification is received, and perhaps in the previous year for a subsequent qualification.
The results are not sensitive to restricting the sample to those firms with sufficient data to estimate
market model parameters in the + 61 to + 360 period.
We also calculate, but do not report, significance levels by first standardizing each firms daily
prediction error by the square root of the estimated forecast variance of the prediction error. The
standardized prediction errors are then averaged across firms each day, yielding a statistic which is
distributed unit normal. The significance tests are not sensitive to the choice of the test statistic.
 N. Dopuch et al., Abnormal returns asocialed wrrh qualrjied audit opimons 99

The estimate of the portfolio time series variance for the test statistic is
sensitive to the estimation period selected, and we chose the method which
produces the lowest t-statistics. Variance estimates are lower if they are
calculated prior to the announcement since extreme price declines occur in that
period for many firms. For example, a security selling at $20.00 six months
before the qualification may be selling for $2.00 when the qualification is
announced, and this decline in price is typically accompanied by an increase in
the return variance.*
To supplement the z-statistics based on the estimated time-series variance of
the portfolio, t-statistics are calculated based on the cross-sectional standard
deviation of firms abnormal returns for an event window of interest. The
degrees of freedom of this statistic are one fewer than the number of firms,
assuming cross-sectional independence in the abnormal returns of firms. The
cross-sectional r-statistic incorporates any increase in the variance of returns
associated with the event in the window examined.
The proportion of firms with negative prediction errors for various periods
of interest is also calculated. The associated P-values indicate the probability
of observing at least that proportion of firms, assuming that the individual
observations represent independent draws from a binomial distribution with a
mean of 0.5 and a variance of (n x 0.5 x OS), where n is the number of firms.
Some results are based on differences in returns between two portfolios. In
these tests, an average prediction error is first formed for each portfolio for
each event date t. The average prediction errors of the two portfolios are then
differenced on each event date. The r-statistic testing the statistical significance
of the difference between the abnormal performance of the two portfolios is
based on the time-series variance of the difference in the average prediction
errors over the hundred-day period, day + 61 through day + 160.

3.2. Results: First-time and subsequent quali$cations

Table 2 presents mean abnormal performance over various subperiods

beginning 300 trading days before the event and ending 60 trading days after

Variance estimates based on a subsequent period can overstate the variance relevant to the
announcement period because some firms delist in that period, and the estimate of the time-series
variance of the portfolio is based on fewer firms than are in the event windows of interest. To test
the sensitivity of the results to this issue, we reestimated the variance by replacing returns for firms
which delisted, or did not trade, with their returns from the period day - 11 to dav - 60. In
general, this procedure reduces the estimated variance and increases the t-statistics, but it does not
change our interpretation of the results. Further, the results are not sensitive to restricting the
sample to those firms with sufficient data to estimate the variance in the period + 61 to + 160.
The independence assumption is reasonable given the dispersion of event dates. For the 114
firms in the sample, there are 111 different event dates. If there is no overlap of calendar days
across firms in the event period - 1 to + 1, the event window will comprise 342 different calendar
days (114 firms x three days per firm). In fact, 307 different calendar days are included in the
three-day window representing 89.8% of the maximum possible.
100 N. Dopuch et al, Abnormal returns associated with qualrjed audiI opinions

Table 2
Percentage average prediction errors (APE), cumulative average prediction errors (CPE), window
average prediction errors ( WAPE), and f-statistics (r-stat.) for the sample of 114 media disclos-
ures of qualified audit opinions from 1970-1982; all first-time qualifications vs. all subsequent
quahfications.a

First-time Subsequent First-time minus

qualiticationsb qualifications subsequents
Trading
days APE CPE APE CPE APE CPE

-300 -61 - 15.97 - 15.97 - 11.85 - 11.85 -4.11 -4.11

-60 -51 - 2.01 - 17.98 - 1.84 - 13.69 -0.18 - 4.29
- 50 -41 -0.32 - 18.30 1 .Ol - 12.68 - 1.32 ~ 5.61
-40 -31 0.60 - 17.70 - 3.40 - 16.08 4.01 - 1.60
-30 -21 - 0.77 - 18.47 0.03 - 16.05 -0.81 - 2.41
- 20 -11 - 1.68 - 20.15 - 2.91 - 18.96 1.24 ~ 1.17
- 10 -0.06 - 20.21 0.27 - 18.69 -0.34 - 1.51
-9 - 0.09 - 20.30 -1.47 - 20.16 1.38 -0.13
-8 -0.52 - 20.82 0.34 - 19.82 -0.86 -0.99
-1 - 0.65 - 21.47 0.85 - 18.97 - 1.50 ~ 2.49
-6 - 0.62 - 22.09 - 0.26 - 19.23 -0.36 - 2.85
-5 -0.10 - 22.19 - 1.42 - 20.65 1.32 ~ 1.53
-4 0.60 -21.59 -0.13 - 20.78 0.73 - 0.80
-3 - 0.60 - 22.19 0.72 - 20.06 - 1.32 - 2.12
-2 -0.12 - 22.91 1.25 - 18.81 - 1.97 - 4.09
-1 -1.30 - 24.21 - 1.17 - 19.98 -0.13 - 4.22
0 - 2.19 - 27.00 - 3.42 -23.40 0.64 - 3.58
1 - 0.62 - 21.62 -0.18 - 23.58 - 0.44 - 4.02
2 0.41 - 27.21 1.57 - 22.01 - 1.17 ~ 5.19
3 0.99 - 26.22 0.11 - 21.24 0.22 - 4.97
4 0.39 - 25.83 0.68 - 20.56 -0.30 ~ 5.21
5 0.66 - 25.17 - 0.55 -21.11 1.22 - 4.05
6 -0.12 - 25.29 -0.12 - 21.23 0.00 - 4.05
I 0.93 - 24.36 1.37 - 19.86 - 0.45 ~ 4.50
8 0.64 - 23.12 0.81 - 19.05 -0.16 -4.66
9 -0.58 - 24.30 - 0.40 - 19.45 -0.18 - 4.84
10 - 0.65 - 24.95 - 1.09 - 20.54 0.44 ~ 4.40
11 20 - 0.62 - 25.51 0.15 - 20.39 - 0.11 - 5.17
21 30 0.49 - 25.08 -1.04 - 21.43 1.53 -3.64
31 40 - 1.46 - 26.54 0.81 - 20.62 - 2.21 - 5.91
41 50 -1.72 - 28.26 2.15 - 17.87 - 4.41 - 10.38
51 60 0.31 - 21.95 - 0.84 - 18.71 1.15 - 9.23

Trading
days WAPE f-stat. WAPE t-stat. WAPE r-stat.

-300 -61 - 15.97 - 2.06 - 11.85 - 0.98 -4.11 - 0.29

-60 -11 -4.18 -1.18 - 7.11 - 1.28 2.93 0.46
- 10 -2 - 2.11 -1.85 0.15 0.06 ~ 2.92 - 1.08
-1 1 - 4.70 - 5.43 - 4.11 ~ 3.51 0.07 0.04
2 10 2.66 1.78 3.04 1.29 -0.38 - 0.14
11 60 - 2.99 -0.85 1.83 0.33 - 4.83 - 0.76

The qualification is first-time if the firm received a clean (unqualified) opinion in the previous
year. The qualification is subsequent if the firm received a qualification in the previous year.
The number of firms in the portfolio varies between 67 and 70.
The number of firms in the portfolio varies between 37 and 39.
 N. Dopuch et al., Abnormal returns associated wrth quulifed audit opinions 101

X IN RANGE

x -25 m-20 -2oto-15 -!%-10 -Ice-5 -5to0 oto5 5to10 :nta15 15to20 20toz5 \ 25

X AENOAWAL RETURN RANGE

FIrsI-TIme Subseuuent

Fig. 1. Distribution of abnormal returns: First-time and subsequent qualifications

the event for the sample of 75 first-time qualifications and the sample of 39
subsequent qualifications. Both average prediction errors (APE) and cumula-
tive average prediction errors (CPE) are presented. Only 67 of the 75 first-time
qualifications have sufficient price data to estimate abnormal performance for
the entire period, compared with 37 of the 39 subsequent qualifications. Five
first-time qualifications are completely eliminated because there is insufficient
data to estimate market model parameters.
Table 2 also summarizes the results for six subperiods ranging from day
- 300 to day + 60. T-statistics (based on the time-series variance of the
portfolio), which test whether the mean abnormal performance in each sub-
period is significantly different from zero, are also presented, together with
tests of the difference in returns between first-time and subsequent qualifica-
tions for each subperiod. Both groups experience similar negative abnormal
performance from day - 300 to day - 2. The announcement period consists of
three days, - 1 to + 1, because day 0 is either a Wall Street Journal announce-
ment which may be dated one day after the news was announced to the
market, or a Broad Tape announcement which may occur after the market
closes.
102 N. Dopuch et al., Abnormal returns associated with qualijied audit opinions

The mean abnormal performance associated with the qualification announce-

ment is negative and reliably different from zero for both first-time and
subsequent qualifications. As shown in table 2, in the period - 1 to + 1,
first-time qualifications experience abnormal performance of -4.70% with a
t-statistic of -5.43, and the subsequent qualifications lose 4.77% with a
t-statistic of -3.51. Though not reported in the table, the cross-
sectional t-statistic, which incorporates any increase in variance around the
event window, is - 3.27 for first-time qualifications and - 3.61 for subsequent
qualifications. The difference in returns between the two samples is 0.07% for
the announcement window with a r-statistic of 0.04.
Fig. 1 summarizes the distribution of abnormal performance for the window
day - 1 to day + 1 for both the first-time and subsequent qualifications. The
negative abnormal performance is pervasive, and not just driven by several
observations. The median is -2.71% for the first-time qualifications and
-2.77% for the subsequent qualifications. Of the first-time qualifications,
72.5% experience negative abnormal performance, as do 76.9% of the subse-
quent qualifications. The P-values for a binomial test indicate the probabilities
of observing the sample proportion of negative abnormal returns or higher are
0.000 for both first-time and subsequent qualifications, if the true population
proportion of negatives is 0.5. As seen in fig. 1, the distributions of abnormal
performance in the window - 1 to + 1 are similar for the two subsamples.
The results in table 2 and fig. 1 suggest that media disclosures of qualified
audit opinions are associated with negative abnormal performance. Previous
studies of subject to qualified opinions do not find evidence of abnormal
performance at the time of the assumed disclosure date. In the next section, we
explore some potential explanations for the conflicting results.

4. Potential explanations for the results

The potential explanations involve (i) simultaneous news announcements,

(ii) movement between unchanged bid and ask prices, (iii) selectivity in
financial reporting, (iv) precision of disclosure dates, and (v) slow dissemina-,
tion of information.

4.1. Simultaneous news announcements

The stock price effect measured in the previous section could be driven by
other news about the firm released simultaneously with, or in close proximity
to, the media disclosure of the qualified opinion. To test this possibility, the
sample is segmented according to whether the observations are contaminated
or non-contaminated by other Wall Street Journal or Broad Tape stories in
the announcement window. Those results are presented in table 3.
 N. Dopuch et al,, Ahnormol returns ussocrated wllh qualifieduudrt op:nrons 103

Table 3
Percentage average prediction errors (APE), cumulative average prediction errors (CPE),
window average prediction errors ( WAPE), and t-statistics (r-stat.) for the sample of 114
media disclosures of qualified audit opinions from 1970-1982; all contaminated observa-
tions vs. all non-contaminated observations.

Contaminated Non-contaminated Contaminated minus

observation& observations non-contammated
Trading
days APE CPE APE CPE APE CPE

~ 300 - 61 - 19.43 - 19.43 -9 12 -9 12 - 10.30 10.30

-60 - 51 - 2.15 -21 5X -1.74 -10X6 0.41 10.71
~ 50 -41 0.64 - 20.94 -0.32 11.18 0.95 - 9 76
-40 - 31 - 0.52 - 21.46 - 1.19 12.37 0 6X - 9.08
-30 - 21 - 0.52 -21.9X - 0.43 -1280 -009 -9.17
- 20 -11 -2 3X - 24.36 -1.86 - 14.66 ~052 - 9.69
- 10 0.06 24 30 0 04 ~ 14.62 0.02 - 9 67
-9 0.03 - 24.27 - 1 23 15.X5 1.27 - 8 40
-8 -0.10 ~ 24.37 -0.33 -16.1X 0.22 -x.1x
-7 ~ 0.04 - 24.41 -0.18 -16 36 0 14 - x 04
-6 - 0.69 ~ 25.10 -0.2x - 16.64 - 0.40 -844
-5 -0.7X - 25 X8 - 0.37 -1701 ~ 0.42 - 8 X6
-4 0.42 - 25.46 0 26 -1675 0.16 -x.70
-3 - 0.28 25.74 0.01 - 16.74 - 0.29 - X.Y9
-2 0.08 25.66 -0.11 16.X5 0.19 - x x0
-1 ~ 2.24 - 27.90 - 0.25 17.10 - 1.99 ~ 10 79
0 - 3.90 -31.X0 -2.12 -1922 1.78 12.57
1 PO.14 - 31.94 -0.80 20 02 0 66 ~ 11.91
2 ~ 0.25 32.19 1.97 - 18.05 _ 2.21 14.12
3 0.57 31.62 1.2X 16.77 0.72 14.84
4 0.47 -31.15 0.51 16 26 - 0.04 ~ 14 xx
5 ~ 0.03 -31.1X 0.52 -1574 -- 0 54 15.42
6 0.49 ~ 30 69 ~ 0.78 -16 52 1 26 14.16
7 1.20 - 29.49 0.98 - 15.54 0.21 - 13.95
X 0.4X - 29.01 0.93 ~ 14.61 0.44 14.39
Y PO.51 29 52 ~ 0.52 15.13 0.01 14.38
10 - 1.10 - 30.62 -051 ~1564 - 0.59 ~ 14.97
11 20 - 0.99 - 31.61 0.31 - 15.33 -1.29 16.26
21 30 0.08 - 31.53 ~ 0.21 ~ 15.54 0 2x 15.9x
31 40 -153 - 33.06 0 27 - 15.27 -1.80 - 17.78
41 50 - 1.74 -34.X0 1.62 -1365 - 3.36 -2114
51 60 0.14 ~ 34 66 - 0.34 13.99 0.48 - 20.66
_
Trading
days WAPE t-stat. WAPE c-stat. WA PE r-stat.

- 300 -61 - 19.43 - 1.71 -9.12 - 1.08 10 30 -070

-60 - 11 ~ 4.94 - 0.95 -5 54 -144 0.60 0.09
- 10 -2 - 1.30 -0.59 -2.18 - 1.34 0.x9 0.31
-1 1 6.28 ~ 4.94 -3 1x - 3.37 - 3.10 - 1.89
2 10 1.32 0.60 4.3x 2.6X - 3.06 - 1.08
11 60 - 4.05 - 0.78 1.65 0.43 - 5.70 -0.85

Observations are classified as contaminated if there is a story about the firm other than the
qualification story in the Wo// Srree~ Journal Index within five trading days ( ~ 2 to + 2) of the
media announcement (day 0): if the story about the quahtication contains mformation other than
a restatement of publicly available information: and. for observations disclosed subsequent to
January 1. 1979, if there is a Broad Tape story within five trading days ( - 2 to + 2) of the media
announcement. All other observations are classified as non-contammated.
The number of firms in the portfolio varies between 53 and 56.
The number of firms in the portfolio varies between 51 and 53.
104 N. Dopuch et ul., Abnormal returns ussoclated with qualiJed uudit opinions

Simultaneous news announcements do not explain all of the previously

measured negative abnormal performance. Abnormal returns for the 55 con-
taminated observations are - 6.28% in the window - 1 to + 1, and - 3.18% for
the 53 non-contaminated observations with t-statistics of - 4.94 and - 3.37.
The cross-sectional f-statistics, not reported in the table, are - 3.82 for the
contaminated sample and - 2.60 for the non-contaminated sample.(
The difference in abnormal performance of the two portfolios is - 3.10% for
the announcement window with a t-statistic of - 1.89, which is significant at
the 10% level (two-tailed test). The performance of the non-contaminated
sample in the window +2 to + 10 exhibits an apparent rebound in the
abnormal performance. The mean abnormal return is 4.38% with a t-statistic
of 2.68, but the median return is only 0.06%. The apparent rebound is
examined in more detail below.
Fig. 2 summarizes the distributions of abnormal returns for the con-
taminated and non-contaminated samples for the - 1 to + 1 window. Negative
abnormal performance is pervasive in both subsamples. The median is - 3.83%
for the contaminated sample and - 2.33% for the non-contaminated sample.
Moreover, 71.2% of the non-contaminated sample earn negative abnormal
returns, with a P-value of 0.001 for the binomial test, while 76.4% of the
contaminated sample have negative abnormal returns with a P-value of 0.000.
Abnormal returns of the non-contaminated sample are more concentrated in
the - 5% to 0% range than are returns for the contaminated sample.

4.2. Movement between unchanged bid and ask prices

The measured abnormal returns could reflect movement between unchanged

bid and ask prices. Daily returns on the CRSP file are based on the price of the
final trade of the day, for each security.* The final trade can be either
buyer-initiated (at the ask price) or seller-initiated (at the bid price). If final
trades on day + 1 are primarily seller-initiated because of the release of bad

First-time and subsequent qualifications are combined because table 2 provides no evidence
that first-time qualifications have a different stock price impact from subsequent qualifications for
the entire sample. Non-contaminated first-time and subsequent qualifications behave similarly. The
30 first-time qualifications lose 3.86% in the - 1 to + 1 window, and the 23 subsequents lose 2.31%.
The difference of - 1.55% is not significant (r-statistic of -0.94).
If the Wull StreetJournul Index does not list all stories in the WuN Sweet Journul, some of the
observations may be classified incorrectly as non-contaminated. As a partial control, we examined
the price effect of non-contaminated observations subsequent to December 31,1978, the period for
which we searched the Dow Jones News Service. That source is more comprehensive - it covers the
Broud Tape, Burrons, and the Wall Street Journal. The thirty non-contaminated observations in
that period lose 3.08, with a r-statistic of - 3.95, in the window - 1 to + 1. Contamination via
other sources, such as regional publications, is still possible.
iz If a security does not trade on a particular day, the return is based on the average of the bid
and ask prices at the close of trading. All returns in the event window are based on trade prices for
the sample in this paper.
 N. Dopuch et al., Abnormal returns associated with qualijied audit opinions 105

X IN RANGE

30

20

10

0
( -a -230-20 -2oto-15 -15ta-10 -iota-5 -5t00 Lx05
118
5to10 10ta15 15to20
Rln
70to75 ) 25
1
I ABNOAWAL RETURN RANGE
Contaminated NOfl
Contaminated

Fig 2. Distribution of abnormal returns: Contaminated and non-contaminated.

news, those prices on average approximate the bid. The final price on day + 1
affects measured returns in the - 1 to + 1 window and measured returns in the
+ 2 to + 10 window. If, in addition, prices at the close of day - 2 and + 10
represent the average of the bid and ask prices across the sample (i.e., if those
transactions are not initiated predominantly by either buyers or sellers) nega-
tive abnormal performance in the - 1 to + 1 window and positive abnormal
performance in the + 2 to + 10 window are artificially induced. That is,
measured firm returns can differ from zero, even though bid and ask prices are
unchanged.13
Artificially induced abnormal returns should be more pronounced for firms
with low share prices. Low priced shares have proportionately high bid-ask
spreads, and trade less frequently, thereby increasing the probability that
closing prices are seller-initiated on days when bad news is released. The

r3The estimate of the time-series variance of the portfolio reflects information about bid-ask
spreads. However, if the events affecting the firms on other days are independent in event time,
closing prices will represent bids and asks roughly half the time, and the variance would not reflect
information about the complete bid-ask spread.
106 N. Dopuch et al., A hnormul returns associated with qualified oudif oprnions

Table 4
Window average prediction errors for non-contaminated samples of media disclosures, including
and excluding observations with prices less than or equal to three dollars.

Window
-1tot1 t2 to +10

Panel A : All non-contaminated observutions

Window average prediction error - 3.18% 4.3R%

Window median prediction error ~ 2.33% 0.06%
r-statistic (time-series variance) - 3.31 2.68
t-statistic (cross-sectional variance) ~ 2.60 2.49
Number of observations 53 52
%<O 71.2% 44.2%
P-valueh 0.0011 0.8341
-~
Panel B: Non-conruminated observations wrih prices > $3.00 on day - 2

Window average prediction error ~ 2.43% 0.61%

Window median prediction error - 2.29% 0.00%
t-statistic (time-series variance) ~ 2.23 0.54
t-statistic (cross-sectional variance) - 2.22 0.55
Number of observations 45 44
%<O 71.1% 50.0%
P-value 0.0033 0.5598

The r-statistics test whether the window average prediction errors are significantly different
from zero.
hIndicates the probability of observing at least the indicated proportion of negative prediction
errors if the population proportion is 50% and the observations represent independent draws.

sample of media announcements of qualifications has a relatively high propor-

tion of shares selling at low prices. Approximately 15% of the non-con-
taminated sample have prices below three dollars, and a t price movement (the
minimum price movement for all firms in the sample) on a three dollar share
represents a 4.17% return. We investigate the sensitivity of measured abnormal
performance to inclusion of those observations in both the - 1 to + 1 window
and the + 2 to + 10 window. If the results are similar when low priced shares
are eliminated, the measured effect is less likely to represent movement
between unchanged bid and ask prices.
Panel A of table 4 summarizes the mean and median abnormal performance
in the - 1 to + 1 and + 2 to + 10 windows for the entire non-contaminated
sample. As indicated previously, median abnormal performance in the - 1 to
+ 1 window is not as negative as the mean, but the loss to the median firm is
sizeable, -2.33%. In contrast, the apparent rebound in the +2 to + 10 day
window noted previously is very sensitive to the statistic chosen. Mean
abnormal performance is 4.38%, but the median measure is 0.06%.
Panel B of table 4 summarizes the results for the non-contaminated sample
excluding eight observations with share prices of three dollars or less. The
 N. Dopuch er al., Abnormal returns associuted with qualijfed uudit opinion.? 107

mean abnormal return in the event window - 1 to + 1 is reduced in absolute

value from - 3.18% to - 2.43%, but remains reliably,less than zero at the 5%
level. The median abnormal return in the event window is affected only slightly
by dropping the observations with share prices under three dollars. Over 71%
of the observations still experience negative abnormal performance (P-value of
0.0033). Though not reported, results for the contaminated sample are not
affected by excluding the observations with share prices of three dollars or less.
Thus, the portfolio abnormal returns are not very sensitive to the exclusion of
low priced stocks in the window - 1 to + 1, suggesting that the results are not
simply due to movement within unchanged bid and ask prices.
In contrast, the results in the window + 2 to + 10 are highly sensitive to the
inclusion of the low priced shares. Mean abnormal performance in the +2 to
+ 10 window is only 0.61% when the low priced shares are excluded, and 50%
of the sample experiences negative abnormal performance. The rebound re-
ported previously is not characteristic of the sample as a whole, but occurs
only for firms with low share prices. We do not interpret the post-announce-
ment rebound as evidence of a trading rule or as evidence that the price effects
of media announcements of the non-contaminated sample are temporary.
Transactions costs, including the bid-ask spread, are large for firms with low
share prices and the variance of returns for a trading rule based on those stocks
would be large.

4.3. Selectivity in jinancial reporting

The media disclosure sample is not random if it results from a systematic

selection process by financial reporters or the firms themselves. For example, if
journalists select qualified opinions that are relatively unexpected or that are
associated with relatively costly contingencies, a sample of media disclosure
qualifications could produce price effects even though such effects are not
observed for a random sample of firms with qualified opinions.
To address the issue of selectivity in financial reporting, several tests are
performed. First, the mix of types of qualifications is compared for a sample of
first-time qualifications not receiving media disclosure and for the media
sample of first-time qualifications. Second, firms in the media disclosure
sample and firms with qualifications not disclosed in the news media are
compared along several dimensions. Probability scores are calculated using a
probit model that estimates the likelihood an auditor will issue a qualified
opinion for a given firm, and some financial and market characteristics of firms
in the two samples are compared. There is no evidence that the media
disclosure sample dithers from a sample without media disclosure of qualifica-
tions with respect to the types of qualifications or the estimated probability
scores. Further, the observed differences in financial and market characteristics
do not suggest an explanation for the results.
10X N. Dopuch et ol., Ahnormul returns associated with qualified audit opinions

To determine if the mix of types of qualifications in the media sample is

different from a sample without media disclosure, the media sample is clas-
sified into five groups: litigation, asset realizing, multiple contingency prob-
lems, future financing, and going concern opinions. The proportion of each
type of qualification for the non-contaminated first-time qualifications in the
media sample is compared with the corresponding proportion reported by
Dodd, Dopuch, Holthausen and Leftwich (1984).14 There are no significant
differences in the proportions of types of qualifications in the two samples. For
example, going concern qualifications represent 10.0% of the non-con-
taminated first-time qualifications with media disclosure, and 7.4% of the
Dodd, Dopuch, Holthausen and Leftwich (1984) sample. A test of differences
in proportions produces a Z-statistic (which is distributed approximately unit
normal) of 0.50.
We estimate the likelihood of a qualified opinion for firms with and without
media disclosure. Dopuch, Holthausen and Leftwich (1985) report a probit
model based on financial statement and market variables which distinguishes
between firms with clean opinions and those with qualified opinions. More-
over, the estimated probability scores are associated with the severity of the
contingency, with going concern opinions having the highest scores and
litigation qualifications having the lowest scores. Asset realizing and multiple
qualifications represent intermediate cases.
The first panel of table 5 contains comparisons of the estimated probabilities
for the media disclosure sample and a non-media disclosure sample, for both
first-time and subsequent qualifications. l5 For the first-time qualifications, both
the mean and median probability scores are higher for the media disclosure
sample, but the differences are not reliable according to the t-statistic for the
difference in means and the x2-test for the difference in medians.16 For the
subsequent qualifications, the media sample has lower mean and median probit
scores than the non-disclosure sample, but those differences are not reliable. As
an additional check, the mean (and median) probit scores of the media
disclosure and non-media disclosure samples are compared by type of qualifi-
cation. This controls for any slight differences in the mix of qualification types

I4 Only first-time qualifications are examined because Dodd, Dopuch, Holthausen and Leftwich
(lYX4) test only first-time qualifications. In addition, since the event rule in that paper eliminates
firms with contaminating earnings announcements, the comparison is restricted to non-con-
taminated first-time qualifications. Going concern opinions and disclaimers of opinion are grouped
together.
I5 The sample of qualifications without media disclosure is the subset of the 786 NYSE and ASE
firms (described in section 2 above) which are not in the financial services industry (SIC codes
600@6YYY) and which have the necessary data available.
lhThe t-statistic tests whether the means of the samples with and without media disclosure are
different from each other, and allows for the sample variances to differ. The x2-statistic tests
whether the medians of the samples with and without media disclosure are different. See Siegel
(1956. pp. 111-116).
 N. Dopuch et al., Abnormal returns associated with qualified audit opinions 109

Table 5
Comparison of probability scores, financial statement and market variables for the media dis-
closure sample and the sample with no media disclosure of qualified opinions. Source: Market
data: CRSP daily returns tile. Financial statement data: Compustat annual industrial file.

First-time qualifications Subsequent qualifications

Media disclosure Sample with no Media disclosure Sample with no
Variable sample media disclosure sample media disclosure

Probubrli@ score
Probability score from probit model classifying qualified and clean opinions using financial
statement and market data [see Dopuch, Holthausen and Leftwich (1985)]
Mean 0.197 0.166 0.143 0.156
Median 0.076 0.068 0.048 0.062
Std. dev. 0.191 0.179 0.169 0.185
r-stat. 0.922 0.359
x2-stath 0.163 0.15 7
# 37 308 23 188
Min. 0.021 0.006 0.001 0.006
MaX. 0.670 0.780 0.490 0.912

Total liabilities/Totalassets
Ratio of total liabilities to total assets at fiscal year end
Mean 0.714 0.665 0.730 0.683
Median 0.698 0.676 0.727 0.682
Std. dev. 0.170 0.230 0.274 0.306
t-stat. 1.816 0.831
X2-stat. 1.734 1.164
# 49 344 28 207
Min. 0.251 0.043 0.058 0.048
MaX. 1.119 1.435 1.193 1.703
_
Soles (log$~millions)
Sales for the fiscal year
Mean 6.016 4.763 5.261 4.826
Median 5.615 4.628 5.431 4.707
Std. dev. 1.689 1.632 1.511 1.714
t-stat. 4.834 1.405
xz-stath 15.284 0.426
# 48 343 28 206
Min. 2.338 0.268 2.170 0.870
MaX 9.789 10.723 7.975 10.399
 110 N. Dopuch et al., Abnormal returns associated with qualified audit opinions

Table 5 (continued)

First-time qualifications Subsequent qualifications

Media disclosure Sample with no Media disclosure Sample with no
Variable . sample media disclosure sample media disclosure

Time listed
Dummy variable set equal to 1 if the firm has been listed on the New York or American Stock
Exchanges fewer than five years
Mean 0.094 0.236 0.233 0.211
Std. dev. 0.295 0.425 0.430 0.409
Z-stat.r ~ 2.349 0.279
# 53 407 30 261
Min. 0.000 0.000 0.000 0.000
Max. 1.000 1.000 1.000 1.000

Standard deviation of returns (5%)

Standard deviation of daily returns (including dividends) calculated over 260 trading days prior to
fiscal year endd
Mean 2.993 3.811 3.616 4.292
Median 3.041 3.600 3.556 3.816
Std. deg. 1.481 1.895 1.715 2.392
t-stat. ~ 3.648 - 1.952
X2-stath 4.043 0.818
# 53 407 30 259
Min. 0.650 0.604 0.766 0.749
Max 6.762 11.058 7.242 11.944

Average dai!y returns minus market (5%)

Average continuously compounded daily return (including dividends) minus return on equally
weighted market index over 260 trading days prior to fiscal year endd
Mean - 0.103 -0.117 - 0.073 -0.107
Median -0.107 - 0.084 ~ 0.080 ~ 0.066
Std. dev. 0.169 0.193 0.147 0.232
t-stat. 0.575 1.123
Xz-stat.h 0.001 0.018
# 53 407 30 261
Min. -0.558 - 0.931 ~ 0.426 - 1.155
Max 0.441 0.309 0.214 0.392

AThe t-statistic tests whether the means of the samples with and without media disclosure are
different from each other, allowing the sample variances to differ.
hThe x2-statistic tests whether the medians of the samples with and without media disclosure
are different from each other [see Siegel (1956, pp. 11 l-116)]. Critical values for the statistic with 1
degree of freedom are 2.71 (10% level), 3.84 (5% level), and 6.64 (1% level).
In the case of dummy variables, a test of differences in proportions is calculated. The Z-statistic
is distributed approximately unit normal.
Calculations are based on the number of days for which the stock traded during that period. If
there are fewer than 100 valid trading days. the observation is eliminated.
 N. Dopuch et al., Abnormal returns msociuted wth qualified audit opinrom 111

in the samples. Those probit score differences (which are not reported) are
small, and statistical tests cannot reject that the mean (and median) probabili-
ties are equal in the media and non-media qualifications of a given type.
The remaining panels of table 5 present evidence on some financial state-
ment and market variables of interest. Firms are compared on the basis of
leverage, size, time listed, standard deviation of returns, and returns less
market returns to determine whether the age, size, risk and recent stock price
performance of a firm influence the financial reporting selection process.
For first-time ,qualifications, leverage of the media sample has a higher mean
(t-statistic of 1.816), but the difference in medians is not significant at even the
10% level (x*-statistic of 1.734). For subsequent qualifications, the two samples
have similar leverage. Firms which receive first-time qualifications and are
reported in the media are larger than firms in the non-media sample using both
mean and median measures of sales. For subsequent qualifications, no signifi-
cant difference is observed, Other size variables, not reported, indicate similar
differences. The time-listed variable indicates that firms in the media sample of
first-time qualifications are older than firms in the non-media sample for
first-time qualifications. No significant difference in time listed is noted for the
subsequent qualifications. Thus, for first-time qualifications, journalists select
firms that are larger and have been listed longer. However, that finding does
not suggest an explanation for the differences in the observed price effects of
the two samples.
Firms in the media sample with first-time qualifications have a lower
standard deviation of returns than firms in the non-media sample. Inferences
on the subsequent qualification sample depend on whether the mean or median
is examined. Though not reported, the systematic risk of the media sample is
close to the non-media sample for both first-time and subsequent qualifica-
tions, and the differences are not statistically significant. Finally, both the
media and non-media samples experience negative abnormal performance
during the fiscal year, but the differences in abnormal performance between the
media and non-media samples are not statistically significant. Since the two
groups have similar prior abnormal performance, there is no evidence that the
market was less aware of the problems facing the media sample.

4.4. Precision of disclosure dates

The power of tests of information content is a function of the precision of

the event date, and previous studies of qualified opinions in the United States
must rely on imprecise disclosure dates such as the annual report release date

The table reports returns less market returns over the fiscal year. Other measures such as
market model prediction errors. raw returns, and returns less industry returns provide similar
results.
 Table 6
Timing of media announcement relative to release date of the earlier of the 10-K or the annual report; sample of 114 media disclosures of qualified
audit opinions from 1970-1982.=

Number of
trading days (D) between
First-timeb Subsequentb Total
media disclosure date and
First disclosure release date of earlier Number of Percentage Number of Percentage Number of Percentage
of qualification of 10-K or annual reportC observations of total observations of total observations of total

DC -20 5 10.6 9 39.1 14 20.0

Annual report -1lSDS -20 5 10.6 3 13.0 8 11.4
or 10-K -lOSD< -3 10 21.3 6 26.1 16 22.9
-2102 -1 1 2.1 1 4.4 2 2.9

Simultaneous D=O 2 4.3 3 13.0 5 7.1

1~0~2 3 6.4 0 0.0 3 4.3

Media 310110 10 21.3 1 4.4 11 15.7
disclosure ll<D<20 2 4.3 0 0.0 2 2.9
20 i D 9 19.1 0 0.0 9 12.8

Total 47 100.0 23 100.0 70 loo.0

Release dates for both the 10-K and the annual report are available for only seventy observations. The annual report release date is the most
difficult to obtain.
The qualification is first-time if the firm received a clean (unqualified) opinion in the previous year. The qualification is subsequent if the firm
received a qualification in the previous year.
'D i 0 if media disclosure date is preceded by a 10-K or annual report.
 N. Dopuch et al., Abnormal returns associaied with quahjied audit opinions 113

or the 10-K filing date. These dates produce imprecise event dates because it is
difficult to determine when public disclosure of the report actually takes place.
Disclosure of the report occurs before the stamped release date for some firms
and later for others. Perhaps, a price effect is detected for the media disclosure
sample because the disclosure dates are identified more precisely. In addition,
the power of tests of information content depend on the extent to which the
event date captures the first disclosure of an event. If the 10-K or annual report
is not always the first source of news about the qualification, the estimate of
the price impact of a qualification will be understated.
Table 6 summarizes the timing of the media disclosure of the qualification
relative to the release date of the earlier of the 10-K or the annual report (AR).
Both 10-K and AR release dates can be obtained for only 70 firms in the
sample. The media disclosures are not always the first source of news about the
qualifications. The media disclosure date follows the release of the 10-K or
annual report for 21 (44.6%) of the 47 first-time qualifications and for 19
(82.6%) of the 23 subsequent qualifications for which all three dates are
available. For 24 (51.1%) of the 47 first-time qualifications, the media dis-
closure precedes the AR or 10-K. The media disclosure occurs before the AR
or 10-K for only one subsequent qualification.
Although the 10-K or annual report is not always the first source of
information about the qualification, significant negative abnormal returns can
be detected for the media disclosure sample even with the event rule which did
not detect significant abnormal returns in the Dodd, Dopuch, Holthausen and
Leftwich (1984) study. Thirty-eight of the first-time qualifications in the media
disclosure sample satisfy that event date algorithm. The results are contained
in panel A of table 7. The subset of 38 firms loses 3.51% during the event
window - 2 to + 2 with a t-statistic of - 2.51. Thus, the event date rule for the
media disclosure sample captures a period of significant negative average
abnormal performance, even though a media story about the qualification
precedes the release of the 10-K or annual report for approximately half of the
firms. The results in panel A of table 7 suggest that either the qualification is a
more important event for the media sample, the event algorithm captures the
effective disclosure date more precisely for the media disclosure sample, or the
10-K or annual report contains news in addition to the qualification.
The results in panel A understate the announcement effect of a qualification
if the financial report is released after a media disclosure for some of the
sample. Panel B contains the results for the subsample of 27 firms where the

The algorithm defines the event date as the release date of the 10-K or annual report,
whichever is earlier, provided that (a) the firm has announcement or release dates for annual
earnings, the 10-K. and the annual report, and (b) the annual earnings number is announced at
least five days before either the 10-K or annual report is released. Due to the difficulty of defining
the exact date when a 10-K or annual report becomes publicly available, the window - 2 to + 2 is
used to detect the announcement effect.
 Table I
E
Window average prediction errors ( WAPE) and r-statistics (r-stat.) for the sample of 114 media disclosures of qualified opinions from 1970-1982 which
meet various timing restrictions among the 10-K, annual report, media disclosure and Wdl Street Journal earnings announcement release dates: Event
date is financial report filing date.g
Timing Restriction
r
b
Panel B:
4
Financial report date pre-
i z-
cedes media disclosure date
2
Panel A : by at least three trading Pmel c:
Financial report date fol- p
Financial report date fol- days (and follows Wall
lows WuN Sfreet Jourd Streef Journal earnings story lows media disclosure date $
earnings story by at least by at least five trading days) by at least three trading 0
five trading days for first- for first-time and subse- days for first-time and sub- 2
time qualificationsh quent qualificationsh sequent qualificationsh B

WAPE t- WAPE t- WAPE

Trading days (I%) stat. (%) stat. (%)

~ 300 -61 ~ 9.19 - 0.93 - 19.16 - 1.65 - 11.17 -0.68

tj
g
-60 -11 - 5.32 - 1.20 ~ 2.96 ~ 0.56 - 11.71 -1.58 s.
-10 -3 0.67 0.38 1.20 0.56 ~ 0.58 -0.19 z
-2 2 - 3.51 - 2.51 ~ 5.21 ~ 3.11 - 0.48 - 0.20 f.
3 10 - 2.36 ~ 1.33 - 1.51 - 0.71 ~ 1.56 -0.53 E
11 60 1.19 0.27 3.12 0.70 - 4.41 -0.60 2
--z
Sample size B
on day 0 37 27 18
B
Percentage negative in B
- 2 to + 2 window 54.1% 63.0% 55.6% 4
3
P-value 0.3714 0.0610 0.2403 S
-2
Financial report date is defined as the earlier of the 10-K filing date or annual report release date, provided both dates are available.
hThe qualification is first-time if the firm received a clean (unqualified) opinion in the previous year. The qualification is subsequent if the tirm
received a qualification in the previous year.
Indicates probability of observing at least the indicated proportion of negative prediction errors if the population proportion is 50% and the
observations represent independent draws.
 N. Dopuch et al., Abnormal returns associated with qualified audit opinions 115

financial report release date precedes the media disclosure date by at least
three trading days and follows a Wall Street Journal earnings story by at least
five trading days. l9 To obtain a reasonable sample size both first-time and
subsequent qualifications are included. Abnormal performance for the sample
of 27 observations is - 5.21% in the window -2 to +2 with a r-statistic of
- 3.11. The proportion of firms with negative abnormal performance in the
- 2 to + 2 window is 63% (P-value of 0.0610).
There is evidence in panel C that the 10-K or AR contains no additional
information about the qualification for the subsample of 18 firms where the
media disclosure date precedes the financial report release date. Abnormal
performance for those 18 firms in the - 2 to + 2 window is - 0.48% with a
f-statistic of - 0.20.

4.5. Slow dissemination of information

Qualified opinions may have information content, but news about qualifica-
tions may be costly to obtain from the 10-K or annual report, at least at the
time those reports are filed. In essence, this is a variant of the previous
explanation, imprecise disclosure dates. Knowledge of a qualified opinion may
not be widely disseminated until some reasonable time has elapsed after the
filing of the 10-K or annual report. 2o A price response may be observed at the
time of a media announcement if the media announcement constitutes wider
dissemination of the news of the qualification.
There is evidence in panel A of table 8 of a price response associated with
the media announcement of a qualification even though the 10-K or annual
report is already filed. For 28 non-contaminated media announcements of
first-time and subsequent qualifications, the media disclosure date follows the
10-K or annual report release date by at least five trading days. Abnormal
performance in the window - 1 to + 1 is -4.18% (t-statistic of -2.93).
Moreover, 71.4% of the firms experience negative abnormal performance
(P-value of 0.0178).
To determine if the results could be due to slow dissemination of news in the
10-K and annual report filings, the test is repeated for the subset of those
observations in panel A with a media disclosure date at least 20 trading days
after the annual report or 10-K. It seems inconceivable (to us) that the

No attempt was made to determine whether other news stories about the firms were released
during the event windows in table 7. Previous studies employing variations of the event rule in
table 7 do not distinguish between contaminated and non-contaminated observations.
The results in panels A and B of table 7 are inconsistent with this explanation, to the extent
that a price response is observed at the time of the 10-K and annual report filing. However, the
price response at that time may be only partial if the information is not widely disseminated and if
the news has negative implications. See Lloyd-Davies and Canes (1978) and Diamond and
Verrecchia (1985).
116 N. Dopuch et a/., Abnormal returns associated with quaL$ed audit opiniom

Table 8
Window average prediction errors ( WAPE) and r-statistics (t-stat.) for the sample of 114 media
disclosures of qualified opinions from 1970-1982 in which media disclosure date follows 10-K or
annual report for non-contaminated first-time and subsequent qualifications: Event date is media
disclosure date.=

Panel B:
Panel A : Media disclosure date fol-
Media disclosure date fol- lows earlier of 10-K or
lows earlier of 10-K or annual report release date
annual report release date by at least twenty trading
by at least five trading days days
WAPE t- WAPE I-
Trading days (R) stat. (%) stat.

-300 -61 - 13.77 - 1.08 - 11.66 - 0.64

~60 -11 - 8.44 -1.45 - 13.58 - 1.63
- 10 -2 - 1.16 - 0.47 PO.59 -0.17
-1 1 - 4.18 ~ 2.93 - 4.93 - 2.42
2 10 5.75 2.33 10.30 2.92
11 60 4.53 0.78 6.50 0.78

Sample size
on day 0 28 12
Percentage negative in
~ 1 to + 1 window 71.4% 83.3%
P-valueb 0.0178 0.0193

*The qualification is first-time if the firm received a clean (unqualified) opinion in the previous
year. The qualification is subsequent if the firm received a qualification in the previous year.
Observations are classified as contaminated if there is a story about the firm other than the
qualification story in the Wall Street Journal Index within five trading days ( - 2 to i2) of the
media announcement (day 0), if the story about the qualification contains information other than a
restatement of publicly available information, or for observations disclosed subsequent to January
1, 1979. if there is a Broad Tape story within five trading days (-2 to +2) of the media
announcement. All other observations are classified as non-contaminated.
Indicates probability of observing at least the indicated proportion of negative prediction errors
if the population is 50% and the observations represent independent draws.

information is not disseminated if the 10-K or annual report has been filed for
20 days. Panel B contains the results for the 12 firms meeting the timing
restriction. The abnormal performance in the window day - 1 to + 1 is
-4.93% (t-statistic of -2.42). Moreover, 83.3% of the sample experience
negative abnormal performance (P-value of 0.0193).

5. Summary and couclusions

Media disclosures of subject to qualified opinions are rare, but, when they
occur, they are associated with significant negative stock price effects. This
finding differs from other studies which are unable to detect price effects
associated with disclosures of qualified opinions.
 N. Dopuch et al., Abnormal returns associated wrth qualified audit opinions 117

We attempted (unsuccessfully) to reconcile our results with previous results

by exploring five potential explanations. No evidence is found which suggests
that the price response associated with media disclosures is due solely to other
news released at the time of the media announcement; that the abnormal
returns represent movement within unchanged bid and ask prices; that the
qualifications in the media disclosure sample are less anticipated or represent
more severe contingencies than qualifications not reported by the media; that
media announcements produce more precise event dates for the first disclosure
of the qualification; or that the filing of a 10-K or annual report constitutes
only partial disclosure.
The results in this paper call into question the generality of the argument
that disclosures of qualified opinions have no effect on stock prices. At the very
least, the results suggest that the price effects associated with qualifications
disclosed in the Wall Street Journal or Broad Tape have a different effect from
those disclosed only through routine 10-K filings or annual report releases. We
are unable to offer a satisfactory explanation for that aspect of the results.
Media disclosure of qualifications appears to be increasing. It will be interest-
ing to see if media disclosures of qualifications subsequent to 1982 result in
similar price effects.

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