Reprint of: Key audit matters disclosures and informed traders

Zabihollah Rezaee and Saeid Homayoun

The British Accounting Review, 2025, vol. 57, issue 1

Abstract: We examine whether the audit regulation of disclosing key audit matters (KAM) provides value-relevant information to short sellers as informed investors. The theoretical underpinning for examining short sellers' ability and incentives to use KAM disclosures in their stock valuation implications is based on a prediction theory and a skilled information processing theory of short sellers. Using a sample of expanded auditor's reports from UK-listed firms during the 2010–2017 period and hand-collecting a dataset of KAM disclosures, we find no evidence that the short interest is different for the period before than after the U.K.'s expanded auditor's report regulation. However, in our cross-sectional tests, we find that KAM disclosures have a marginal effect on short interest and a positive association between short interest and unexpected and severe KAM disclosures. We conclude that, except for severe KAM that is value-relevant to sophisticated investors, the disclosures in the expanded auditor's report have no valuation implications for short sellers. Our results are robust in examining the reactions of the financial market and analysts to KAM disclosures and addressing potential endogeneity concerns.

Keywords: Key audit matters disclosure; Expanded auditor's report; ISA 700; Short sellers; Short interest (search for similar items in EconPapers)
JEL-codes: G12 G14 G20 G21 G32 K22 M42 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:bracre:v:57:y:2025:i:1:s0890838925000046

DOI: 10.1016/j.bar.2025.101554

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