Is PCAOB International Inspection Program Beneficial?

Project: Research

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Description

We explore the staggered introduction of the Public Company Accounting OversightBoard (PCAOB) inspection regime for non-U.S. auditors as exogenous shocks to thestringency of public audit oversight in the perception of institutional investors. Lookingat a sample of foreign firms listed in the U.S. and audited by non-U.S. auditors, weinvestigate whether these firms’ potential institutional investors value the monitoringprovided by the PCAOB inspection program, and thus be more willing to hold thesefirms’ stocks if their auditors are exposed to PCAOB inspections. Given institutionalinvestors’ home bias (preference to invest in domestic firms), we expect that the morestringent public audit oversight will help foreign firms to attract more institutionalinvestors from a country other than their country of origin (e.g., the U.S. or othercountry). Using a difference-in-differences research design with firm fixed effects, weintend to investigate whether U.S. listed foreign firms exhibit an increased number andshare ownership in U.S./other country institutional investors after their auditors aresubject to PCAOB inspection access. We further investigate whether this effect isstronger for clients of non-Big 4 auditors compared with Big 4 auditors. In general, weintend to examine whether institutional investors of U.S. listed foreign firms appreciatethe more stringent regulatory audit oversight as facilitated by the PCAOB’s internationalinspection program, and whether this is particularly the case for firms audited by smallauditors.We contribute to the literature in three important ways. First, our work is among thefirst attempts to examine impacts of PCAOB inspection access on institutional investorhome bias. Our work examines whether institutional investors trade in the U.S. marketappreciate the PCAOB’s inspection program, and provides direct evidence on whetherinstitutional investors benefit from the potentially improved audit quality brought aboutby a more stringent public audit oversight. Second, this study contributes to priorliterature on the usefulness of PCAOB inspections. There are studies arguing about bothpros and cons of the PCAOB inspection program. This study helps to explore anotherpotential benefit of PCAOB inspections: alleviation of institutional investor home bias.Third, so far no studies look at how PCAOB inspections affect big versus small non-U.S.auditors. We separately examine how PCAOB inspection access affects institutionalinvestments in clients of Big 4 versus non-Big 4 auditors. Our study is importantbecause they help to show that, compared to non-Big 4, whether Big 4 auditors benefitless from PCAOB inspections.

Detail(s)

Project number9042566
Grant typeGRF
StatusFinished
Effective start/end date1/01/1811/05/21