Adoption and Content of Key Audit Matters and Stock Price Crash Risk
Posted: 26 Feb 2021 Last revised: 22 Nov 2021
Date Written: November 18, 2021
We examine whether the mandate for auditors to report key audit matters (KAMs) affects firm-specific stock price crash risk in China. Auditors in China are required to issue an expanded audit report that contains KAMs for AH-share firms, effective January 1, 2017 (applicable to the financial year 2016), and for A-share firms, effective January 1, 2018 (applicable to the financial year 2017). Applying a staggered difference-in-differences (D-i-D) design to a sample of 15,563 observations for financial years 2012-2018, we find that auditor reporting of KAMs is not significantly associated with stock price crash risk. Textual analyses buttress this finding by revealing that the content of KAMs does not significantly impact stock price crash risk. Numerous additional analyses reinforce our primary findings. Finally, we show that our findings are not sensitive, but are robust to firms’ information environment, corporate governance, product market competition, ownership structure, and auditor size. Overall, we have confidence in our findings for informing regulators, investors, auditors, and other stakeholders interested in the economic consequences of mandating KAM disclosures.
Keywords: Expanded audit report, Key audit matters, stock price crash risk, China
JEL Classification: M42
Suggested Citation: Suggested Citation