Adoption and Content of Key Audit Matters and Stock Price Crash Risk

Posted: 26 Feb 2021 Last revised: 22 Nov 2021

See all articles by Lin Liao

Lin Liao

Nanjing Audit Univeristy

Divesh Sharma

Kennesaw State University, School of Accountancy

Yitang (Jenny) Yang

UNSW Australia Business School, School of Accounting

Rui Zhao

Southwestern University of Finance and Economics (SWUFE)

Date Written: November 18, 2021

Abstract

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

Liao, Lin and Sharma, Divesh Shankar and Yang, Yitang and Zhao, Rui, Adoption and Content of Key Audit Matters and Stock Price Crash Risk (November 18, 2021). Available at SSRN: https://ssrn.com/abstract=3780885

Lin Liao (Contact Author)

Nanjing Audit Univeristy ( email )

86 Yushan W Rd
Nanjing, Jiangsu 210017
China

Divesh Shankar Sharma

Kennesaw State University, School of Accountancy ( email )

Kennesaw, GA 30144
United States

Yitang Yang

UNSW Australia Business School, School of Accounting ( email )

Sydney, NSW 2052
Australia

Rui Zhao

Southwestern University of Finance and Economics (SWUFE) ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

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