The Impact of Key Audit Matters Disclosure on Investor Reaction: An Empirical Evidence from Thai Listed Companies

Abstract

The objectives of this study are; Firstly, to investigate the KAMs issue, the number of KAMs issues, and the KAMs readability of Thai listed companies during the periods from 2016 to 2019. Secondly, to examine whether the KAMs disclosure (the number of KAMs issues and the KAMs readability) has effect on the investor reaction. Thirdly, to examine whether audit characteristics (audit firm size, audit industry expertise, audit tenure, and audit risk) has effect on the KAMs disclosure. Finally, to examine whether corporate characteristics (firm profitability, firm size, firm leverage, and firm age) has effect on the KAMs disclosure. The theories are used in this study consist of; Firstly, the communication theory is applied to explain the KAMs issue, the number of KAMs issues, and the KAMs readability that the auditors provide to investors through the auditor’s reports. Secondly, the signaling theory is applied to explain the relationship between KAMs disclosure and investor reaction. Finally, the legitimacy theory is applied to explain the relationship between audit characteristics, corporate characteristics, and KAMs disclosure. The sample group is 1,874 firm-year observations companies on the Stock Exchange of Thailand (SET) and the Market of Alternative Investment (mai) from all industry groups except companies listed in banking, financial, and insurance during the periods from 2016 to 2019. The method of this study based on secondary data. Moreover, the statistical regression method was used with unbalanced panel data analysis by the data is collected in cross-section and time-series for testing the hypothesis.

The results of this study showed that; Firstly, the top three KAMs issues during the periods being studied were the same in each of the four years included revenue recognition, inventory and allowance, and investment and impairment of investment. Additionally, this study found that although the mean of the number of KAMs issues has tended to decrease, the level of KAMs readability has tended to increase. Secondly, the number of KAMs issues has no significant effect with both absolute cumulative abnormal return and abnormal trading volume around the announcement date of the auditor’s report. On the other hand, the results showed the KAMs readability has positive significance with both absolute cumulative abnormal return and abnormal trading volume. Finally, the audit characteristics and corporate characteristics which can affect KAMs disclosure found mixed result from evidence. The audit tenure and firm profitability have negative significance with the number of KAMs issues, while the firm size has positive significance with the number of KAMs issues. In addition, the audit firm size and audit tenure have positive significance with KAMs readability, while the firm leverage has negative significance with KAMs readability.

The theoretical contribution of this study included; Firstly, the communication theory was used to explain the solution of communication between auditors and investors that will demonstrate and explain the level and content of KAMs disclosure. This study extends the testing KAMs disclosure by adding KAMs readability and found that the level of KAMs readability has tended to increase. The result shed light on the KAMs readability that the auditors realized that the improvement in readability could enhance the usefulness and communication value of the KAMs disclosure to the investor (Smith, 2016). Secondly, the signaling theory can be used to explain the behavior of the investor when they received more understanding information that performed by the auditor. Therefore, this finding can conclude that more readable of KAMs disclosure in the auditor’s report will reduce the information gap between the auditor and the investor. Finally, the legitimacy theory was used to explain that society expects more information from the auditors and the companies for their decision. In terms of audit characteristics, the result found that audit firm size has effect on the number of KAMs issues, and especially audit tenure has effects on both of KAMs disclosure. In terms of corporate characteristics, the result found that the firm profitability and firm size have effect on the number of KAMs issues and the firm leverage effect on KAMs readability. This theory can explain the reasons for the KAMs disclosure as being a quality communication between the auditor and the investors of listed companies in Thailand. The results shed light on these categories of audit characteristics and corporate characteristics are important for creating the format and content that contains in the KAMs disclosure section in the auditor’s report.

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