Authors: Grigoria Chlomou, Efthimios Demirakos

Title: How Do Financial Analysts Value Firms with a Going-Concern Audit Opinion?

Abstract

In this study, we focus on UK-listed firms with a going-concern audit opinion to identify the valuation methods that financial analysts use to value distressed companies. The argument that financially distressed firms are difficult to value motivates our work and highlights the importance of our findings and the implications of our study. In this context, we also examine the effects of contemporary macroeconomic environment, Covid-19 pandemic, and accounting issues on firms’ liquidity and solvency as depicted in their expanded audit reports.The Covid-19 pandemic has put a significant number of firms, especially in the Travel & Leisure sector, under pressure potentially affecting the auditors’ decision to raise a going-concern flag. To accomplish our research objectives, we analyze the content of equity research reports for this sample of financially distressed firms to find the most popular valuation methodologies that financial analysts adopt to base their target prices and stock recommendations. Moreover, we investigate the extent of financial analysts’ optimism in firms that are considered distressed. Hence, our research sheds light on both auditors’ and financial analysts’ frameworks of analysis.