Mandatorily Disclosed Materiality Thresholds, their Determinants, and their Association with Earnings Multiples

53 Pages Posted: 18 Jul 2015 Last revised: 10 May 2017

See all articles by Dan Amiram

Dan Amiram

Tel Aviv University - Coller School of Management

Justin Chircop

Lancaster University Management School

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School

Ken V. Peasnell

Lancaster University - Department of Accounting and Finance

Date Written: May 09, 2017

Abstract

This study addresses two related research questions concerning a new requirement in the United Kingdom that auditors disclose the materiality thresholds they apply when conducting the audit of listed companies. First, are cross-sectional differences in materiality thresholds associated with differences in the demands of financial statement users for high quality information as reflected by differences in analyst following, leverage, and managerial equity stakes? We find that the firm’s reliance on debt financing and the extent of insider shareholding are associated with lower auditor materiality thresholds. Second, do investors use the materiality threshold information when assessing the reliability of earnings for equity valuation purposes? We find that the difference between the earnings multiples of high and low materiality firms decreases after the disclosure of the thresholds. This finding is consistent with low materiality firms benefiting from the revelation that auditors apply a more stringent threshold, thereby improving the perceived relative reliability of their financial statements.

Suggested Citation

Amiram, Dan and Chircop, Justin and Landsman, Wayne R. and Peasnell, Kenneth V., Mandatorily Disclosed Materiality Thresholds, their Determinants, and their Association with Earnings Multiples (May 09, 2017). Columbia Business School Research Paper No. 15-69. Available at SSRN: https://ssrn.com/abstract=2631876 or http://dx.doi.org/10.2139/ssrn.2631876

Dan Amiram (Contact Author)

Tel Aviv University - Coller School of Management ( email )

Tel Aviv
Israel

Justin Chircop

Lancaster University Management School ( email )

Lancaster University
Lancaster, Lancashire LA1 4YX
United Kingdom

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-3221 (Phone)
919-962-4727 (Fax)

Kenneth V. Peasnell

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
+44 1524 593631 (Phone)
+44 1524 847321 (Fax)

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