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Critical audit matters and stock price crash risk |
Xiaoqiang Zhi1, Zuming Kang2() |
1. Department of Finance, Business School, Renmin University of China, Room 0204, Chongde East Building in Renmin University of China, No.59 Zhongguancun Street, Beijing, Haidian District, China 2. Department of Finance, Business School, Renmin University of China, Room 0439, Pinyuan 3 Building in Renmin University of China, No.59 Zhongguancun Street, Beijing, Haidian District, China |
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Abstract Using manually collected data on the number and category of critical audit matters (CAMs) in the period 2016–2017, we investigate the hitherto unexplored questions of whether CAMs affect firm-specific crash risk, how CAMs influence crash risk in the Chinese capital market, and recognize CAMs that contain incremental information. Our findings are as follows: (1) Crash risk decreases after implementing the new audit standard requiring the disclosure of CAMs; (2) CAMs release negative information and change the capital market information environment; (3) only corporateidiosyncratic CAMs contain incremental information; (4) crash risk is mitigated only by CAMs disclosed by companies with a high shareholding of institutional investors. The main conclusion of our study is a positive assessment of the new audit standard and of CAMs in terms of protecting the interests of investors and strengthening the stability of the capital market to provide a new perspective for supervising the implementation of the new audit standard.
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Keywords
Critical audit matters (CAMs)
Crash risk
Incremental information
New audit standard
Corporate-idiosyncratic CAMs
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Issue Date: 25 April 2021
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