Adoption and Content of Key Audit Matters and Stock Price Crash Risk

We examine whether the mandate for auditors to report 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 firms, effective on January 1, 2017 (applicable to the financial year 2016), and for A-share firms, effective on January 1, 2018 (applicable to the financial year 2017). Applying a staggered difference-in-differences (D-i-D) design on a sample of 15,563 observations for financial years 2012-2018, we find that auditor reporting of KAMs is not significantly associated with stock price crash risk. We also show that our findings are not sensitive, but are robust to firms’ information environment, corporate governance, product market competition, ownership structure, and auditor size. Overall, our study informs regulators, investors, auditors, and other stakeholders interested in the economic consequences of mandating KAM disclosures