The impact of auditors' opinions, macroeconomic and industry factors on financial distress prediction: An empirical investigation

Bi-Huei Tsai*, Cheng Few Lee, Lili Sun

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

19 Scopus citations

Abstract

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.

Original languageEnglish
Pages (from-to)417-454
Number of pages38
JournalReview of Pacific Basin Financial Markets and Policies
Volume12
Issue number3
DOIs
StatePublished - 22 Oct 2009

Keywords

  • Auditors' opinion
  • Discrete-time hazard model
  • Earnings quality
  • Financial distress
  • Macroeconomics

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