The Impact of Short-Selling System on the Disclosure of Key Audit Matters

Abstract

This study asks whether the introduction of short selling changes the way auditors report Key Audit Matters. Using the phased expansion of China’s margin trading pilot after 2010 as a natural experiment, we apply a staggered difference in differences design to A share listed firms from 2017 to 2021. Our results show that after a firm becomes eligible for short selling, the textual similarity of its KAM disclosures to industry peers declines significantly. That decline suggests a move away from boilerplate language and toward more firm specific, informative narratives. The effect survives parallel trend checks and placebo tests. We further find that the improvement is driven by firms located in provinces with stronger market institutions and, notably, by clients of non Big 4 auditors. The pattern points to consistent with a possible channel: external market pressure directly shapes auditors’ disclosure decisions. Our evidence adds to the literature on short selling’s governance role and on what drives KAM quality. For policy, the findings argue for continuing capital market liberalisation, tighter oversight of disclosure practices, and targeted support for smaller audit firms.