Do Key Audit Matter Disclosures Reduce Stock Price Crash Risk?

This study investigates whether and how the extent of key audit matter (KAM) disclosures in the audit report provides incremental information and communication value by examining its effect on stock price crash risk. Our empirical evidence shows that the extent of firm-specific KAM disclosures is negatively associated with future crash risk, suggesting that firm-specific KAMs weaken the effectiveness of bad news hoarding and help investors understand firms’ underlying risks. Furthermore, this effect is more pronounced when managers engage more in bad news hoarding, firms have stronger board oversight of financial reporting, and investors are more sophisticated. Overall, our findings suggest that firm-specific KAMs discipline corporate disclosures and are informative to financial reporting users.