Informativeness of Critical Audit Matter (CAM) Disclosures: Investor Perceptions and Market Reactions

ABSTRACT This study analyzes how Critical Audit Matter (CAM) disclosures affect investor perceptions and market responses to discretionary reporting, by examining market reactions to the interaction between the textual characteristics of CAM disclosures and both discretionary (DLLP) and non‐discretionary (NDLLP) loan loss provisions in the banking sector. The results show that discretionary loan loss provisions are generally associated with a positive market reaction, as they may signal managerial confidence or financial strength. However, this reaction is reduced when CAM disclosures indicate audit complexity, contain a negative tone, or include uncertain language—leading to increased return volatility around the 10‐K filing date. These findings highlight the role CAM disclosures play in shaping how investors interpret managerial judgment in financial reporting. More broadly, the results carry regulatory implications by offering evidence on the informational value of CAM disclosures and their effectiveness in supporting investor decision‐making in complex reporting environments.