![]() | Only 14 pages are availabe for public view |
Abstract This study investigates whether the disclosure of key audit matters (KAMs) in the expanded audit report impacts capital cost (limited to debt cost). Using a sample of 125 firm-year observations of Saudi listed firms from 2021 to 2022. The disclosure of KAMs is indicated by three characteristics: number of KAMs disclosed, the length of KAMs disclosed and the readability of KAMs disclosed. The researchers use content analysis to measure disclosure of KAMs from annual reports and examines how it impacts the debt cost in companies. We document that readability of KAM disclosed is significantly and negatively associated with cost of debt, implying that the easier the KAM paragraph to read, the lower cost of debt. As clarity and simplicity of KAM disclosure enhance lenders’ ability to read and process the intended message, thus improving the communicative value and relieving lenders’ fears about the firm, thus reducing the cost of debt. Also, firms with audit reports that disclose better readable KAMs exhibit lower risk perception of lenders. However, the number and the length of KAMs disclosed is not significantly associated with debt cost. This study suggests that there should be consideration of the auditors’ writing skills when hiring auditors, which play an important role in the readability of KAMs and debt cost. |