Public Audit Oversight and Reporting Credibility: Evidence from the PCAOB Inspection Regime

131 Pages Posted: 8 Sep 2015 Last revised: 3 Aug 2017

See all articles by Brandon Gipper

Brandon Gipper

Stanford University Graduate School of Business

Christian Leuz

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); University of Pennsylvania - Wharton Financial Institutions Center; CESifo Research Network

Mark G. Maffett

University of Chicago - Booth School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: July 20, 2017

Abstract

This paper examines how regulatory oversight of the audit profession affects investors’ assessments of reporting credibility and trust in financial reporting. We analyze whether market responses to earnings news increase after the introduction of the Public Company Accounting Oversight Board (PCAOB), as predicted by theory if such oversight enhances reporting credibility. We use a generalized difference-in-differences design and exploit the fact that the new regime affects firms at different points in time, depending on their fiscal year-ends, auditors, and the rollout of auditor inspections, to disentangle regime effects from other macro and regulatory changes. We find that investors respond more strongly to earnings news following PCAOB oversight. Corroborating these findings, we also find an increase in volume responses to firms’ 10-K filings after the new regime is in place. Overall, our results are consistent with regulatory oversight of the audit profession increasing investor trust and reporting credibility, relative to the prior peer review.

Keywords: Regulation, Enforcement, Public oversight, Trust, Auditing, Earnings response coefficients

JEL Classification: G14, G18, G38, K22, M41, M42, M48

Suggested Citation

Gipper, Brandon and Leuz, Christian and Maffett, Mark G., Public Audit Oversight and Reporting Credibility: Evidence from the PCAOB Inspection Regime (July 20, 2017). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 453/2015; Chicago Booth Research Paper No. 15-40. Available at SSRN: https://ssrn.com/abstract=2641211 or http://dx.doi.org/10.2139/ssrn.2641211

Brandon Gipper

Stanford University Graduate School of Business ( email )

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Christian Leuz

University of Chicago - Booth School of Business ( email )

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HOME PAGE: http://faculty.chicagobooth.edu/christian.leuz/

National Bureau of Economic Research (NBER) ( email )

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European Corporate Governance Institute (ECGI)

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HOME PAGE: http://www.ecgi.org

Center for Financial Studies (CFS) ( email )

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University of Pennsylvania - Wharton Financial Institutions Center

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CESifo Research Network

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Mark G. Maffett (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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