Key Audit Matters and Stock Price Crash Risk

Posted: 26 Feb 2021

See all articles by Lin Liao

Lin Liao

Southwestern University of Finance & Econ China

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: February 2021

Abstract

We examine whether the mandate to disclose 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 companies, effective January 1, 2017, and for A-share companies, effective January 1, 2018. Using a difference-in-differences (D-i-D) design, we document that the disclosure of KAMs is not significantly associated with stock price crash risk. To galvanize our findings, we perform an extensive array of robustness tests. Our findings are not conditional on a company’s information environment, corporate governance, or product market competition. Textual analyses reveal that the disclosure content in KAMs does not significantly impact stock price crash risk, and numerous additional analyses reinforce our primary findings. Accordingly, we have confidence in our findings to inform 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, Key Audit Matters and Stock Price Crash Risk (February 2021). Available at SSRN: https://ssrn.com/abstract=3780885

Lin Liao (Contact Author)

Southwestern University of Finance & Econ China ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China
02887352040 (Phone)

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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