Key audit matters and debt contracting: evidence from China
ISSN: 0268-6902
Article publication date: 14 June 2022
Issue publication date: 28 June 2022
Abstract
Purpose
In an effort to make audit reports more informative to users, the Public Company Accounting Oversight Board and the International Auditing and Assurance Standards Board adopted a standard that requires auditors to disclose key audit matters (KAMs). This paper aims to explore the impact of the risk information provided by KAMs on corporate debt contracting.
Design/methodology/approach
In China, the KAM standard went into effect for A + H cross-listing companies in 2017 and became mandatory for all listed companies in 2018. This study takes this as an exogenous shock to examine the impact of the KAM disclosures on debt contracting. This study also designs a path analysis to open the “black box” between the risk information in KAMs and the risk perception of creditors. Moreover, This study conducts a textual analysis on the KAMs information based on samples after the release of the KAM standard.
Findings
This study conducts difference-in-difference tests and find that the KAM disclosures decrease interest rates and increase the proportion of long-term debt. Path analyses reveal that the KAM disclosures lead to more favorable debt characteristics through decreasing information asymmetry. This study also finds that the more KAMs are disclosed, the more favorable debt characteristics are and that different categories of KAMs have different effects on debt contracting.
Originality/value
This paper highlights the benefits of KAM disclosures, which are consistent with the convergence argument of risk information disclosures. Investors’ reactions to KAMs are mixed because of the differences in how professional investors and nonprofessional investors interpret information. This study provides evidence of incrementally informative nature of KAMs from the perspective of debt holders, who are professional information users.
Keywords
Acknowledgements
Data availability statement: The data that support the findings of this study are available from the corresponding author upon reasonable request.
Hui Liu sincerely appreciates the research facilities and comments from colleagues at Bryant University. Hui Liu and Junrui Zhang are thankful for the financial support of the National Natural Science Foundation (Grant No. 72002171 and 72072143). Hui Liu is also thankful for the financial support of Soft Science Research Program in Shaanxi Province (Grant No. 2022KRM168) and the Fundamental Research Funds for the Central Universities (Grant No. 3102020XJS01).
Ethics approval statement: Our manuscript is not published elsewhere. I and all co-authors meet criteria for authorship and ensure appropriate acknowledgements made in the manuscript.
Citation
Liu, H., Ning, J., Zhang, Y. and Zhang, J. (2022), "Key audit matters and debt contracting: evidence from China", Managerial Auditing Journal, Vol. 37 No. 6, pp. 657-678. https://doi.org/10.1108/MAJ-06-2021-3210
Publisher
:Emerald Publishing Limited
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