TY - JOUR
T1 - The impact of auditors' opinions, macroeconomic and industry factors on financial distress prediction
T2 - An empirical investigation
AU - Tsai, Bi-Huei
AU - Lee, Cheng Few
AU - Sun, Lili
PY - 2009
Y1 - 2009
N2 - This study investigates the usefulness of auditors' opinions, market factors, macroeconomic factors, and industry factors in predicting financial distress of Taiwanese firms. Specifically, two non-traditional auditors' opinions are evaluated: "long-term investment audited by other auditors" ("other auditor"), and "realized investment income based on non-audited financial statements" ("no auditor"). The results of the 22 discrete-time hazard models show that "other auditor" opinions have incremental contribution in predicting financial distress, in addition to "going concern" opinions. This suggests that "other auditor" opinions possess higher risk of overstating earnings and firms with such income items are more likely to fail. Besides, we find that the macroeconomic factors studied significantly explain financial distress. Particularly, the survivals of electronic firms are more sensitive to earnings due to higher earnings fluctuations in such firms. Finally, models with auditors' opinions, market factors, macroeconomic factors, and industry factors perform better than the financial ratio-only model in financial distress prediction.
AB - This study investigates the usefulness of auditors' opinions, market factors, macroeconomic factors, and industry factors in predicting financial distress of Taiwanese firms. Specifically, two non-traditional auditors' opinions are evaluated: "long-term investment audited by other auditors" ("other auditor"), and "realized investment income based on non-audited financial statements" ("no auditor"). The results of the 22 discrete-time hazard models show that "other auditor" opinions have incremental contribution in predicting financial distress, in addition to "going concern" opinions. This suggests that "other auditor" opinions possess higher risk of overstating earnings and firms with such income items are more likely to fail. Besides, we find that the macroeconomic factors studied significantly explain financial distress. Particularly, the survivals of electronic firms are more sensitive to earnings due to higher earnings fluctuations in such firms. Finally, models with auditors' opinions, market factors, macroeconomic factors, and industry factors perform better than the financial ratio-only model in financial distress prediction.
KW - Auditors' opinion
KW - Discrete-time hazard model
KW - Earnings quality
KW - Financial distress
KW - Macroeconomics
UR - http://www.scopus.com/inward/record.url?scp=70350055330&partnerID=8YFLogxK
U2 - 10.1142/S0219091509001691
DO - 10.1142/S0219091509001691
M3 - Article
AN - SCOPUS:70350055330
SN - 0219-0915
VL - 12
SP - 417
EP - 454
JO - Review of Pacific Basin Financial Markets and Policies
JF - Review of Pacific Basin Financial Markets and Policies
IS - 3
ER -