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Does Auditor Regulatory Oversight Affect Corporate Financing and Investment Decisions?

56 Pages Posted: 2 Oct 2015 Last revised: 22 Sep 2017

Nemit Shroff

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: September 19, 2017

Abstract

This paper examines the real effects of auditor regulatory oversight on companies’ financing and investing policies. Using the Public Company Accounting Oversight Board’s (PCAOBs) international inspection program as a setting to generate within-country variation in auditor oversight, I find that companies respond to the increase in auditor oversight by issuing additional external capital amounting to 0.5% of assets and increasing capital expenditures by 0.3% of assets. These effects are larger for financially constrained companies and weaker for companies whose auditors’ are criticized by the PCAOB for having deficient engagement practices. This paper documents the importance of auditor oversight in mitigating external financing frictions.

Keywords: investment, debt capacity, financial accounting, reliability, real effects, PCAOB, audit, certification

Suggested Citation

Shroff, Nemit, Does Auditor Regulatory Oversight Affect Corporate Financing and Investment Decisions? (September 19, 2017). Available at SSRN: https://ssrn.com/abstract=2667969 or http://dx.doi.org/10.2139/ssrn.2667969

Nemit Shroff (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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