Does Auditor Regulatory Oversight Affect Corporate Financing and Investment Decisions?

Abstract

I examine whether auditor regulatory oversight reduces external financing frictions and leads to changes in companies’ financing and investing policies. I use the Public Company Accounting Oversight Board’s (PCAOBs) international inspection program as a setting to generate within-country variation in auditor oversight. Using a difference-in-differences design that exploits the staggered nature of PCAOB international inspections, I find that companies respond to the increase in auditor oversight by issuing additional external capital amounting to 0.5% of their assets and increasing capital expenditures by 0.3% of their assets. Further, these effects are significantly larger for financially constrained companies. Finally, the effect of auditor oversight on companies’ financing and investing policies depends on the content of its auditor’s PCAOB inspection report; companies whose auditors’ are criticized for having deficient engagement practices respond to PCAOB oversight with significantly smaller changes in financing and investment. This paper shows that auditor regulatory oversight increases companies’ external financing capacity, which in turn facilitates corporate investment.

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