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Managerial Overconfidence, Going-Concern Modified Audit Opinion, Global Financial Crisis
We examine how auditors perceive managerial overconfidence during audit reporting by testing the relationship between managerial overconfidence and the likelihood of issuing a first-time going-concern modified audit opinion to financially distressed firms. After controlling for the factors affecting auditor’s going-concern modified audit opinion decision, we find that the likelihood of issuing a first-time going-concern modified audit opinion is positively associated with managerial overconfidence, suggesting that auditors adversely value overconfident management in financially distressed firms and thus tend to issue a first-time going-concern modified audit opinion to them. We also find that the positive association above is reinforced with capital market uncertainty.