This study aims to investigate the economic consequences of increased information disclosure from the disclosure of key audit matters (KAMs) in audit reports, particularly on firms’ cost of capital (measured as the implied cost of equity). This study also examines the relationship between KAMs and the cost of capital for early-adopting firms. This study examines the regulatory impact by comparing the “voluntary early adoption” group with the “mandatory adoption (non-early adopters)” group. This study further explores how firm size affects the relationship between KAMs and the cost of capital.
Leveraging a unique data set of Japanese listed firms, this study uses pooled ordinary least squares regression with year- and industry-fixed effects and propensity score matching as robustness checks to test differences between early and non-early KAMs adopters concerning the economic consequences of implementing KAMs in audit reports.
The results indicate that the mandatory application of KAMs is associated with an increase in the cost of capital but not uniformly across different firms. An increase was observed in both non-early adopters and smaller firms.
By using a unique KAMs implementation in Japan, this study investigates the economic impact of voluntary early versus non-early adopters and how the relationship between KAMs and the cost of capital varies across different firm sizes and attempts to discuss the results theoretically. These findings provide valuable insights for regulators, highlighting the importance of gradual mandatory implementation of KAMs, especially for small firms and firms that did not participate in voluntary early adoption.
