Does the mandatory disclosure of audit information affect analysts' information acquisition?

Kong, Dongmin; Ji, Mianmian; Li, Shasha

doi:10.1016/j.irfa.2022.102281

Cited by 23 publications

(14 citation statements)

References 59 publications

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“…Additional analyses show that KAM disclosures provided by auditors with industry specialization are associated with reduced analyst forecast errors and forecast dispersion. This lends support to previous findings that specialized auditors are perceived to have higher audit quality by analysts (Behn et al , 2008; Kong et al , 2021). We also find that the expanded reports provided by auditors that have greater dependence on client revenues and those that have alumni relations to client’s board and management are associated with greater forecast error and greater forecast dispersion.…”

Section: Introductionsupporting

confidence: 90%

“…Chen et al (2019) find that in the post-KAM period, analysts raise more targeted questions related to KAMs during corporate site visits and have subsequently improved their forecast performance. Kong et al (2021) find that the frequency of analysts’ company visits decreases after the passage of the KAM disclosure standard. They even find a spillover effect on analyst visits for peer firms if KAM disclosures are provided by auditors with industry specialization.…”

Section: Introductionmentioning

confidence: 86%

“…In China, corporate site visits are an important way for analysts to obtain and accumulate private information. Kong et al (2021) find that the frequency of analysts' company visits decreases after the issuance of KAM disclosures. The study even finds a similar effect on analyst visits for peer firms if KAM disclosures are provided by specialized auditors.…”

Section: Literature Review and Hypothesesmentioning

confidence: 99%

“…Since the institution of IAASB’s ISA 701 and similar standards in various countries around the world, it has stirred significant interest in academics. So far the existing research has focused on the following areas: auditor liability (Backof et al , 2019; Brasel et al , 2016; Brown et al , 2020; Gimbar et al , 2016; Kachelmeier et al , 2020), audit fees and audit quality (Almulla and Bradbury, 2018; Bedard et al , 2018; Gutierrez et al , 2018; Reid et al , 2019), capital market reactions (Bedard et al , 2018; Gutierrez et al , 2018; Lennox et al , 2021; Zhai et al , 2021), individual users’ decisions or assessments (Boolaky and Quick, 2016; Christensen et al , 2014; Kachelmeier et al , 2020; Köhler et al , 2020; Sirois, Bedard and Bera, 2018) and changes in analysts’ information acquisition (Chen et al , 2019; Kong et al , 2021). These studies were conducted in various locales around the globe, including the UK, China, France, South Africa, New Zealand and the USA.…”

Section: Literature Review and Hypothesesmentioning

confidence: 99%

“…In this study, we are motivated to examine whether the new KAM disclosure requirement is associated with an improvement in users’ decision-making by focusing on the properties of analyst earnings forecasts. Though Kong et al (2021) and Chen et al (2019) have examined the impact of KAM disclosure on financial analysts, their studies are based on analysts’ private information acquisition behavior using company visit data uniquely available in China. Chen et al (2019) find that in the post-KAM period, analysts raise more targeted questions related to KAMs during corporate site visits and have subsequently improved their forecast performance.…”

Section: Introductionmentioning

confidence: 99%

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The impact of key audit matter reporting on analyst forecast accuracy and forecast dispersion: evidence from Chinese listed firms

Lin

et al. 2022

MAJ

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Purpose The purpose of this study is to investigate the decision usefulness of key audit matters (KAMs) disclosures from the perspective of financial analysts. Design/methodology/approach Using data from two groups of Chinese-listed firms subject to different audit standards, the authors use a quasi-natural experiment and the difference-in-differences approach to examine the impact of KAMs on analyst forecasts. The authors also conduct a textual analysis on management disclosures as well as on the content of KAM disclosures. Findings The results of this study show that both forecast errors and dispersion have significantly declined for the firms disclosing KAMs compared to the firms without such disclosures. Further analysis presents evidence that KAM disclosures have resulted in simultaneous increase in management disclosures and audit quality. In addition, auditor characteristics, such as auditor’s dependence on client fees and its industry specialization, and firm’s characteristics, such as its ownership structure and its social connection with the auditor, appear to affect the informativeness of KAM disclosures. The authors also perform content analysis of KAMs to provide additional insight. Research limitations/implications As AH firms are required to adopt the expanded audit report one year before A shares firms, by design, there is only one year in which these two types of companies differ. Therefore, the results without overgeneralizing the impact of KAM disclosures should be interpreted. In addition, this study involves the Chinese market alone and, therefore, may be affected by factors peculiar to the functioning of the Chinese economy and financial markets. Originality/value The main contribution of this study lies in highlighting the salience of KAM context in shaping the relationship between auditors, managers and analysts and its collective impact on information environment. The findings of this study are significant in that they help establish the importance of KAM disclosures in helping to assure that higher quality financial information is available to capital markets, as well as information that is otherwise unavailable given disclosure mandates in China. This study adds to the literature on the importance of providing additional means of safeguarding auditor independence and on the value of auditor expertise in providing useful content in audit disclosures. Moreover, the findings suggest that the expanded audit report can help reduce the level of asymmetric information, especially for state-owned entities. They provide insight on how the new audit rule influences managers and auditors communicating complex accounting matters as well as the moderating effect of the social connections between auditors and firm executives.

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Section: Introductionsupporting

confidence: 90%

Section: Introductionmentioning

confidence: 86%

Section: Literature Review and Hypothesesmentioning

confidence: 99%