The Association between PCAOB Inspection Reports and SEO Discounting

Posted: 17 Oct 2017 Last revised: 12 Oct 2021

See all articles by Lawrence Abbott

Lawrence Abbott

University of Wisconsin - Milwaukee - Sheldon B. Lubar School of Business

William L. Buslepp

Louisiana State University, Baton Rouge - Department of Accounting

James Moon

Georgia Institute of Technology - Scheller College of Business

Laura Swenson

University of Wisconsin - Milwaukee

Date Written: September 2020

Abstract

We examine the association between Public Company Accounting Oversight Board (PCAOB) inspection reports and a firm’s cost of equity capital, measured using seasoned equity offering (SEO) discounting. SEO discounting occurs when the offer price is lower than the prior day’s market price of the firm’s shares and represents ‘money left on the table’ for issuing firms. SEO discounting is a non-trivial cost to an issuing firm, and its occurrence is increasing in both frequency and magnitude. We document an economically significant, positive association between SEO discounting and the use of an auditor found to be deficient by the PCAOB, and this association is most pronounced for clients of smaller, triennially inspected auditors for which few other signals of quality exist. Cross-sectional evidence suggests that, for clients of triennially inspected auditors, this relation is stronger for timelier inspection reports and smaller auditing firms. In conclusion, our evidence is consistent with PCAOB inspections providing meaningful information about audit quality to market participants, particularly for clients of smaller, triennially inspected auditors.

Keywords: PCAOB, SEO, Discounting, Audit Quality

JEL Classification: M41, M42, G12, K22

Suggested Citation

Abbott, Lawrence and Buslepp, William L. and Moon, James and Swenson, Laura, The Association between PCAOB Inspection Reports and SEO Discounting (September 2020). Available at SSRN: https://ssrn.com/abstract=3054548 or http://dx.doi.org/10.2139/ssrn.3054548

Lawrence Abbott (Contact Author)

University of Wisconsin - Milwaukee - Sheldon B. Lubar School of Business ( email )

P.O. Box 742
3202 N. Maryland Ave.
Milwaukee, WI 53201-0742
United States

William L. Buslepp

Louisiana State University, Baton Rouge - Department of Accounting ( email )

E.J. Ourso College of Business Administration
2800 Business Education Complex
Baton Rouge, LA 70803
United States

James Moon

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

Laura Swenson

University of Wisconsin - Milwaukee ( email )

Bolton Hall 802
3210 N. Maryland Ave.
Milwaukee, WI 53211
United States

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