5-4 - Do auditors' opinions, industry factors and...

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Do auditors' opinions, industry factors and macroeconomic factors signal financial distress? Evidence from Taiwan Chengfew Lee Finance and Economics Rutgers Business School Graduate Institute of Finance National Chiao Tung University Lili Sun Accounting and Information Systems Rutgers Business School Bi-Huei Tsai Department of Management Science National Chiao Tung University Correspondence: Bi-Huei Tsai Department of Management Science College of Management National Chiao Tung University Tel:886-3-5712121 ext.57111 E-mail: Joy@mail.nctu.edu.tw
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Do auditors' opinions, industry factors and macroeconomic factors signal financial distress? Evidence from Taiwan Abstract This study investigates the usefulness of auditors’ opinions, macroeconomic factors, and industry factors in predicting financial distress of Taiwanese firms. Predictors that aim to capture the unique nature of business and economy in Taiwan are utilized. 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 major industry factor examined is electronics industry which constitutes a heavy portion of Taiwan economy. As to macroeconomic factors, we examine: currency (M1b) supply change ratio, 1-year depositary interest rate change ratio, and consumer price index change ratio. The results of the 27 discrete-time hazard models show that “other auditor” opinions have incremental contribution in predicting financial distress, in addition to “going concern” opinions. It suggests that investment income audited by other auditors possess higher risk of overstating earnings and firms with such income items are more likely to fail. Besides, we find that all three macroeconomic factors studied significantly explain financial distress. Especially, the survivals of electronic firms are less sensitive to interest rate fluctuations due to lower debt ratios in such firms. Finally, models with auditors’ opinions, macroeconomic factors, and industry factors perform better than the financial- ratio-only model. Key Words: Financial distress, Auditors’ opinion, Discrete-time hazard model, Macroeconomics, Earnings quality 2
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1. Introduction In U.S. economy, the number and the magnitude of financial distress filing have been soaring in recent years, which have caused serious wealth loss of investors and creditors. Along with the economy globalization, similar phenomenon is often observed overseas. This calls for developing financial distress prediction models based upon not only U.S. data but also foreign data. This study responds to the call by attempting to develop financial distress prediction models using Taiwan data. Financial distress prediction study in Taiwan economy is interesting and important because Taiwan, in addition to its strong economy, has great success in electronics industry as one of the world's largest supplier of computer
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This note was uploaded on 07/26/2011 for the course ECON 101 taught by Professor Markspenser during the Spring '11 term at Webster FL.

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5-4 - Do auditors' opinions, industry factors and...

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