Going Concern Note, Downsizing and Exit

Date
2017-08-23
Authors
Suruyama, Sumio
Xu, Peng
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Abstract
This paper investigates the effect of accounting standard requiring financial statement going concern notes on subsequent bankruptcy as well as the effects on subsequent corporate downsizing. We examine that extreme poor performing firms are more likely to disclose going concern uncertainties with a restructuring plan announcement. But firms with more financial institutional ownership, more managerial ownership hesitate to disclose uncertainties about business survival. The average going concern note effect on subsequent bankruptcy is statistically and economically significant. In particular, there are aggressive downsizing in assets, borrowings and labor workforce for survival firms as results of proposed solutions to mitigate disclosed adverse conditions and events. Our going concern note effects estimators are in comparison with potential outcomes if the going concern note had not been disclosed. We provide important evidence that newly adopted management going concern disclosure requirement works as a means to enhance downsizing or exit of extreme poor performing firms by informing market participants.
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Keywords
going-concern note, accounting standards, downsizing, exit
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