Accounting & Tax

‘Going-Concern’ Statements Actually Have a Silver Lining

A new study says going-concern statments lead to accurate pricing of IPOs.
CFO.com StaffMay 7, 2001

According to a Dow Jones Newswires report in the Wall Street Journal, going-concern statements have their bright side.

The statments are written by an auditor and attached to an initial public offering to suggest that there’s doubt a company can stay in business. According to a recent study by two accounting professors, this usually leads to an IPO’s being priced more reasonably and precisely.

Many analysts complain that IPOs are intentionally underpriced so that the day it opens, it’s guaranteed to rise. Not so with companies with going-concern statements, say James KcKeown of Smeal College of Business Administration at Penn State University and Michael Willenborg of the University of Connecticut.

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It would seem counterintuitive to buy such stocks, but a surprising number of them actually make it public. McKeown and Willenborg found that in 1993 and 1994, 25 percent of the 280 companies that went public had going-concern statements, says the Dow Jones report.

The professors are quick to add that such companies, though they do make it to public markets, should be taken for what they are: companies with something amiss in their business plans.

Why do people buy these stocks? Mostly, they don’t pay attention, according Dow Jones, which quotes IpoPros.com president Ben Holmes: “When the IPO market is hot, people don’t care about fundamentals.”

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