Does the Threat of a PCAOB Inspection Mitigate U.S. Institutional Investors’ Home Bias?

73 Pages Posted: 7 Dec 2017 Last revised: 29 Apr 2019

See all articles by Yue He

Yue He

City University of Hong Kong

Bing Li

City University of Hong Kong (CityUHK)

Zhenbin Liu

Hong Kong Baptist University

Jeffrey Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Date Written: April 2019

Abstract

We exploit the staggered introduction of the Public Company Accounting Oversight Board’s (PCAOB) international inspection program to examine the role that exogenous shocks to the stringency of public audit oversight plays in shaping U.S. institutional investors’ home bias. Analyzing a sample of foreign firms listed in the U.S., we evaluate whether U.S. institutional investors hold larger equity stakes in these firms if their auditors are exposed to the threat of a PCAOB inspection. In a differences-in-differences framework, we find that U.S. listed foreign firms enjoy an increase in the number and percentage share ownership of U.S. institutional investors after their auditors become subject to PCAOB inspection access. Cross-sectional analysis implies that the benefit of the PCAOB inspection threat in mitigating U.S. institutional investors’ home bias is concentrated in foreign countries without a strict local audit oversight system. In another series of results, our evidence suggests that the presence of strong institutions governing investor protection and disclosure standards are necessary conditions for U.S. institutional investors to value PCAOB inspection access.

Keywords: PCAOB Inspection; Audit Quality; U.S. Institutional Investors; Home Bias

JEL Classification: G18; L51; M4

Suggested Citation

He, Yue and Li, Bing and Liu, Zhenbin and Pittman, Jeffrey A., Does the Threat of a PCAOB Inspection Mitigate U.S. Institutional Investors’ Home Bias? (April 2019). Available at SSRN: https://ssrn.com/abstract=3079447 or http://dx.doi.org/10.2139/ssrn.3079447

Yue He

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Bing Li

City University of Hong Kong (CityUHK) ( email )

83 Tat Chee Avenue
Department of Accountancy, AC3
Kowloon
Hong Kong

HOME PAGE: http://www.cb.cityu.edu.hk/staff/bingli/

Zhenbin Liu

Hong Kong Baptist University ( email )

Kowloon Tong, Kowloon
Hong Kong

HOME PAGE: http://aclw.hkbu.edu.hk/eng/faculty/admin-details.jsp?id=zbliuHKB&cv=00069&cid=306&cp=1

Jeffrey A. Pittman (Contact Author)

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

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