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

The primary research purpose of this study is to identify the most popular valuation models that analysts use to derive their target prices for firms with going-concern issues.The study conducts a structured content analysis of both auditors’ and analysts’ reports for a sample of UK-listed firms with going-concern audit opinions in a period that captures the effect of the COVID-19 pandemic. The leading EBITDA and EBIT multiples and the DCF model are the most prevalent techniques that analysts use to value UK-listed firms with going-concern audit opinions. In the Real Estate / Energy sectors, analysts use more frequently the NAV method as a basis for their target prices. The study also shows that the pandemic of COVID-19 as well as other firm-specific factors put a substantial number of firms under distress, potentially affecting the auditors’ decision to raise a going-concern flag. Moreover, the study offers evidence that supports the view of analysts’ optimism for firms that are considered financially distressed. The study has important implications for researchers in the fields of market-based accounting research and auditing as it offers empirical evidence of both analysts’ and auditors’ frameworks of analysis.It could also help capital market participants to better understand the valuation practices for financially distressed firms during the period of the COVID-19 pandemic. To the best of the authors’ knowledge, this is the first study that examines the analysts’ valuation models for firms with going-concern audit opinions