Does increased information disclosed in audit reports lead to a lower cost of capital? Evidence from Japan

Purpose – This study investigates the economic consequences of increased information disclosure from the disclosure of Key Audit Matters (KAMs) in audit reports, particularly on firms' cost of capital. 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 “non-early adopters.” This study also explores how firm size affects the relationship between KAMs and the cost of capital. Design/methodology/approach – Leveraging a unique dataset of Japanese listed firms, this study employs pooled ordinary least squares (OLS) regression with firm- and industry-fixed effects and propensity score matching as robustness checks to test early and non-early KAMs concerning the economic consequences of implementing KAMs in audit reports. Findings—The results indicate that the mandatory application of KAMs increases the cost of capital but not uniformly across different firms. An increase was observed in both non-early adopters and smaller firms. Originality/value – By utilizing a unique KAMs implementation in Japan, this study investigates the economic impact of mandatory versus voluntary KAMs adopters and how the relationship between KAMs and the cost of capital varies across different firm sizes. 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.