The Effect of Key Audit Matters Disclosure on Corporate Innovation

43 Pages Posted: 1 Nov 2023

See all articles by Xu Cheng

Xu Cheng

Central South University

Dongmin Kong

School of Economics, Huazhong University of Science and Technology

Xinwei Zheng

Department of Finance

Abstract

We examine whether, and how, audit regulatory changes affect corporate innovation. Using the key audit matters disclosure (KAM disclosure) as a quasi-natural experiment, we find that KAM disclosure has a causal effect on enhancing corporate innovation. We also identify two underlying mechanisms through which KAM disclosures spur corporate innovation by restraining managerial myopia and improving corporate risk taking. Cross-section analysis further shows that the effect of KAM disclosure is more significant in firms with high internal control quality and institutional shareholdings. Our study highlights how managers respond to audit regulatory change from the perspective of shaping corporate innovation decision making.

Keywords: key audit matters, corporate innovation, auditors' prudence, investor attention

Suggested Citation

Cheng, Xu and Kong, Dongmin and Zheng, Xinwei, The Effect of Key Audit Matters Disclosure on Corporate Innovation. Available at SSRN: https://ssrn.com/abstract=4613710 or http://dx.doi.org/10.2139/ssrn.4613710

Xu Cheng

Central South University ( email )

Changsha, Hunan 410083
China

Dongmin Kong

School of Economics, Huazhong University of Science and Technology ( email )

Bldg. of Econ. School, Louyu Rd. 1037#
HUST, Hongshan Dist.
Wuhan, Hubei 430074
China

Xinwei Zheng (Contact Author)

Department of Finance ( email )

221 Burwood Highway
Burwood, Victoria 3125
Australia

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