Key audit matters and stock price synchronicity: Evidence from a quasi-natural experiment in China

Zhai, Huayun; Lu, Meiting; Shan, Yaowen; Liu, Qingzhuo; Zhao, Ying

doi:10.1016/j.irfa.2021.101747

Cited by 42 publications

(18 citation statements)

References 36 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Though several previous studies do not find significant investor reaction in using short-window tests, Lennox et al (2021) and Almulla and Bradbury (2018) find that in the long run, the risks of KAMs disclosed by auditors are value relevant. In addition, Reid et al (2019) show that earnings response coefficients increase after the introduction of the new disclosure requirement and Zhai et al (2021) present evidence that KAM disclosure reduces stock price synchronicity, a measure which shows the degree of unique firm-level information accessible to the public. The lack of investor reaction could be because of information disclosed in KAMs already made available via other channels (Lennox et al , 2021).…”

Section: Introductionmentioning

confidence: 81%

“…The final sample consists of 1,245 firms that have complete data in both 2015 and 2016, including 52 dual-listed firms with A and H shares and 1,193 firms issuing A shares only. About 4% of the total observations are dual-listed firms that are required to comply with KAM reporting rules, consistent with those documented in prior studies (Zhai et al, 2021). More than half of the dual-listed firms are from the manufacturing sector.…”

Section: Impact Of Key Audit Matter Reportingmentioning

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%

See 2 more Smart Citations

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

Lin

et al. 2022

MAJ

View full text Add to dashboard Cite

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.

show abstract

Section: Introductionmentioning

confidence: 81%

Section: Impact Of Key Audit Matter Reportingmentioning

confidence: 99%

Section: Literature Review and Hypothesesmentioning

confidence: 99%

See 1 more Smart Citation

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

Lin

et al. 2022

MAJ

View full text Add to dashboard Cite

show abstract

“…A different stream of literature has examined the impact of KAM reporting on various elements. For example, KAMs are found to be significantly associated with risk disclosures by managers (Elmarzouky et al, 2022) and stock price synchronicity (Zhai et al, 2021). The analysis of the extant literature on auditor reports suggests that no studies were conducted to measure the readability of these reports.…”

Section: Empirical Literature and Hypotheses Developmentmentioning

confidence: 99%

“…For example, KAMs are found to be significantly associated with risk disclosures by managers (Elmarzouky et al. , 2022) and stock price synchronicity (Zhai et al. , 2021).…”

Section: Literature Reviewmentioning

confidence: 99%

Does managerial ability and auditor report readability affect corporate liquidity and cost of debt?

Dalwai

Habib

Mohammadi

et al. 2023

ARA

View full text Add to dashboard Cite

PurposeThis study investigates the impact of managerial ability and auditor report readability on the cost of debt and corporate liquidity in Omani-listed industrial companies.Design/methodology/approachThe study uses data from the S&P Capital IQ database and audited annual reports published on Muscat Securities Market. The sample consists of 35 firms (175 firm-year observations) from 2015 to 2019. Managerial ability is measured using the data envelopment analysis proposed by Demerjian et al. (2012a, b). Auditor report readability is measured as a log of the auditor report digital file size proposed by Loughran and McDonald (2014).FindingsThis study finds that a company's managerial ability reduces the cost of debt lending support to upper echelons and agency theory. Highly able managers of industrial companies are associated with increased corporate liquidity consistent with the precautionary motive of holding cash. In addition, less-readable auditor reports contribute to higher debt costs and reduce corporate liquidity.Originality/valueTo the best of the authors’ knowledge, few studies have explored the influence of managerial ability and auditor reporting readability on firms' financial policy. For industrial-sector firms, this study demonstrates the managerial ability and readability of auditor readability as significant determinants of the cost of debt and corporate liquidity, especially during periods of uncertainty. Thus, the findings can be generalized to other non-financial sector firms in the country and the Middle East.

show abstract

Do lottery characteristics matter for analysts’ forecast behavior?

Lin

Yang

2023

Rev Quant Finan Acc

View full text Add to dashboard Cite

Key audit matters and stock price synchronicity: Evidence from a quasi-natural experiment in China

Cited by 42 publications

References 36 publications

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

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

Does managerial ability and auditor report readability affect corporate liquidity and cost of debt?

Do lottery characteristics matter for analysts’ forecast behavior?

Contact Info

Product

Resources

About