Auditor Regulatory Oversight, Private Information Flow, and Return Predictability: Evidence from PCAOB International Inspection Program

This study examines the effect of auditor regulatory oversight on short sellers’ private information advantage in an international setting. Utilizing a difference-in-differences research design, we find that PCAOB international inspection reduces the ability of shorting transactions to predict negative future returns. The finding is consistent with the view that PCAOB inspection reduces private information advantage of short sellers by improving the quality of firm-specific public information in the market. We further find that this effect of PCAOB inspection is stronger for countries with more opaque information environment, for earlier-year inspections of PCAOB, and for countries with lower audit quality prior to PCAOB inspection. Our study highlights the role of PCAOB inspection in facilitating the establishment of a level-playing field in the capital market by reducing the predictive ability of shorting on future stock return.