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

138 Pages Posted: 8 Sep 2015 Last revised: 18 Jan 2019

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: December 20, 2018

Abstract

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

Gipper, Brandon and Leuz, Christian and Maffett, Mark G., Public Audit Oversight and Reporting Credibility: Evidence from the PCAOB Inspection Regime (December 20, 2018). 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/

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European Corporate Governance Institute (ECGI)

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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 )

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Chicago, IL 60637
United States

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