Real Effects of PCAOB International Inspections

Abstract

This paper examines the effect of the Public Company Accounting Oversight Board (PCAOB) international inspection program on companies’ financing and investing decisions. Estimates from difference-in-differences regressions suggest that companies respond to their auditor receiving a ‘deficiency-free’ inspection report by issuing additional external capital amounting to 1.4% of assets and increasing investment by 0.5% of assets. These effects are larger for (i) financially constrained companies and (ii) companies located in countries where there is no audit regulator or the audit regulator does not conduct inspections. Further, the effect on financing decisions is stronger in countries with (i) low corruption, (ii) strong rule of law, and (iii) high regulatory quality. Descriptive evidence suggests that inspections increase the use of financial covenants in debt contracts, which is likely one of the mechanisms through which inspections generate real effects. This paper documents the value of PCAOB inspections in mitigating financing frictions for non-U.S. companies.

Keywords: investment, real effects, financing constraints, auditing, financial reporting, regulation

JEL Classification: D8, D25, G15, G31, G38, M4, M41, M42