The communicative value of key audit matters in M&As: The effect of performance commitments

Previous research suggests that including performance commitment contracts (PCs) in mergers and acquisitions (M&As) increases the post-acquisition risk of goodwill impairment. Using a sample of Chinese companies from 2017 to 2022, we find that M&As with PCs not only lead auditors to be more likely to disclose M&A-related key audit matters (KAMs) in audit reports but also result in these disclosures being less boilerplate. Moreover, KAMs related to M&As with PCs are more informative, as evidenced by higher cumulative absolute abnormal returns, greater abnormal trading volume, and lower share price synchronisation. Our findings further indicate that the negative relationship between PCs and the disclosure of boilerplate M&A-related KAMs is particularly pronounced when auditors face higher accountability risks or when they are more prudent or prioritise their professional reputations. Additionally, M&A-related KAMs with more detailed information attract greater attention from analysts and institutional investors. Overall, our results suggest that auditors, driven by professional diligence, enhance the communicative value of KAMs by disclosing non-boilerplate information, thereby facilitating the effective transmission of risk information in the capital market.