The Peer Effect of Key Audit Matter Disclosure: Evidence From China

ABSTRACT This study examines whether the disclosure of the Key Audit Matters (KAMs) has a peer effect within an industry. Using a sample of China‐listed firms from 2017 to 2022, we find a significant industry‐specific peer effect in the KAM disclosure behavior, which remains consistent across various robustness tests. The peer effect of the KAM disclosure is more substantial when corporate market competition is more fierce. Specifically, the cut‐throat competition leads to higher auditing risk for auditors who have to alleviate the risk by imitating the KAM disclosure behavior of their peers within the same industry, thereby leading to a peer effect in KAM disclosure. Heterogeneity analysis exhibits that the extent of peer effect in the KAM disclosure varies among corporate ownership structure, auditor expertise, and media coverage. This study contributes to the literature on the KAM disclosure and offers important policy implications for auditing standard construction and regulation on KAM disclosure.