The Spillover of U.S. Regulatory Oversight to Foreign Markets : Evidence from the Effect of PCAOB International Inspections on Executive Compensations

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

View graph of relations

Author(s)

Related Research Unit(s)

Detail(s)

Original languageEnglish
Number of pages30
Journal / PublicationEuropean Accounting Review
Online published8 Sept 2023
Publication statusOnline published - 8 Sept 2023

Abstract

We examine the spillover effect of the Public Company Accounting Oversight Board (PCAOB) international inspection program on improving the contracting role of accounting numbers in executive compensations in an international setting. For a sample of non-U.S.-listed foreign public firms with PCAOB-inspected foreign auditors, we find a significant increase in the sensitivity of their executive cash compensations to earnings after the release of the first inspection reports on their auditors by the PCAOB, relative to those without PCAOB-inspected foreign auditors. Such a result suggests that the compensation committees of firms with PCAOB-inspected auditors infer that the quality of earnings as a performance measure for determining executive compensations improves due to the PCAOB’s inspections of their auditors. We also find that a clean inspection report issued to the firm’s auditor has an incremental effect on increasing earnings pay-for-performance sensitivity. Our findings provide novel evidence on the effectiveness of U.S. regulatory oversight in foreign markets and should interest the PCAOB and local audit regulators around the world. © 2023 European Accounting Association.

Research Area(s)

  • Audit quality, Contract usefulness of accounting, Executive compensation, PCAOB international inspections

Citation Format(s)