The Effect of Materiality Disclosures on Investors’ Decision Making
51 Pages Posted: 6 Jan 2018 Last revised: 21 Dec 2018
Date Written: January 4, 2018
Recent reviews of the academic literature indicate that little is known regarding how users evaluate the materiality levels auditors use or respond to quantitative materiality disclosure. Regulators around the world have taken different stances on whether materiality should, or should not, be disclosed in the auditor’s report. In response to the dearth of research on these policy decisions, we examine the effect of audit materiality disclosures, or lack thereof, on professional investors’ decision making across different investment contexts (debt vs. equity, public vs. private). Our study is designed to test global audit policy and as such our hypotheses are motivated by audit theory, auditing standards, and assertions made by regulators. Among a sample of 246 professional investors, we find that investors struggle to understand materiality disclosures. Most importantly, we do not find evidence that investors’ decisions are consistent with audit theory or regulator assertions. For example, investors fail to make consistent connections between the amount of disclosed audit materiality and the level of auditor effort. Our results hold across debt and equity investment settings for both public and private companies. In sum, our findings suggest that disclosures of audit materiality are not well understood by professional investors. This research informs practitioners, regulators, and academics regarding the effect of materiality disclosure on investor decision making as well as stakeholders’ views and expectations of overall materiality.
Keywords: audit report, investment decisions, investors, materiality disclosure
JEL Classification: M40, M42
Suggested Citation: Suggested Citation