Public Audit Oversight and Reporting Credibility: Evidence from the PCAOB Inspection Regime
138 Pages Posted: 8 Sep 2015 Last revised: 18 Jan 2019
Date Written: December 20, 2018
This paper studies the effects of reporting credibility in capital markets and whether public regulatory oversight of the audit profession enhances reporting credibility. We analyze whether market responses to earnings news increase after the introduction of the Public Company Accounting Oversight Board (PCAOB), as predicted by information economics if such oversight enhances reporting credibility. We use a generalized difference-in-differences analysis, exploiting in our design that the new regime affects firms at different points in time, depending on their fiscal year ends, auditors, and the rollout of auditor inspections. We find that investors respond more strongly to earnings news following public audit oversight. Corroborating these findings, we also find an increase in volume responses to firms’ 10-K filings once the new regime is in place. Overall, our results show that public audit oversight can enhance the credibility of audited financial reports, which in turn is priced in capital markets.
Keywords: Regulation, Enforcement, Public oversight, Auditing, Earnings response coefficients
JEL Classification: G14, G18, G38, K22, M41, M42, M48
Suggested Citation: Suggested Citation