The Effect of Key Audit Matters on Investor Sentiment in Companies Listed on the Tehran Stock Exchange

Abstract

Investor Sentiment (SENT) is recognized as one of the key determinants in financial decision-making, influencing asset pricing and market volatility. This SENT, which reflects investors’ irrational optimism or pessimism toward firm stocks, can lead to deviations of market prices from their intrinsic values. Prior studies indicate that SENT is affected not only by fundamental factors but also by psychological and behavioral variables. One such factor is Key Audit Matters (KAMs). As a component of the auditor’s report, KAMs provide information regarding significant audit risks, which may influence investors’ judgments. Investors’ reactions to these disclosures may reflect their level of confidence in the transparency and reliability of financial reporting. Accordingly, the objective of this study is to examine the effect of KAMs on SENT in companies listed on the Tehran Stock Exchange (TSE). To achieve this objective, a hypothesis was developed. The study sample consists of 119 firms listed on the TSE over the period 2019–2023. To test the hypothesis, a multiple regression model based on panel data was employed. The empirical results indicate that KAMs have a positive and significant effect on SENT. This finding suggests that the transparent disclosure of KAMs enhances investors’ confidence and optimism, thereby significantly strengthening SENT.