Audit Regulation and the Cost of Equity Capital: Evidence From the PCAOB’s International Inspection Regime

52 Pages Posted: 6 Mar 2020

See all articles by Phillip T. Lamoreaux

Phillip T. Lamoreaux

Arizona State University

Nathan J. Newton

Florida State University

Landon M. Mauler

Florida State University - Department of Accounting

Date Written: October 30, 2019

Abstract

This study investigates the relation between audit regulation and the cost of equity capital. While a relation is intuitively appealing, there is a general lack of empirical evidence because changes in audit regulation are frequently accompanied by other major regulatory changes. We exploit variation in the timing of regulatory changes induced by foreign governments’ staggered allowance of PCAOB inspections. Using a difference-in-differences design, we find that foreign SEC registrants with auditors from countries that allow PCAOB inspections enjoy a lower cost of capital, relative to foreign SEC registrants with auditors from countries that prohibit inspections. Further, we find that this cost of capital effect is attenuated for companies with higher quality existing governance mechanisms. Finally, we document that inspection access is associated with higher quality analyst forecasts, which suggests that this change in audit regulation reduces information risk for market participants.

Keywords: Audit Regulation; Audit Policy; PCAOB; Cost of Capital; International

JEL Classification: M40; M42; K22; K33; G28

Suggested Citation

Lamoreaux, Phillip T. and Newton, Nathan J. and Mauler, Landon M., Audit Regulation and the Cost of Equity Capital: Evidence From the PCAOB’s International Inspection Regime (October 30, 2019). Available at SSRN: https://ssrn.com/abstract=3536406 or http://dx.doi.org/10.2139/ssrn.3536406

Phillip T. Lamoreaux (Contact Author)

Arizona State University ( email )

Tempe, AZ 85287
United States

Nathan J. Newton

Florida State University ( email )

Rovetta Business Bldg. (RBA)
College of Business
Tallahassee, FL 32306-1110
United States

HOME PAGE: http://https://business.fsu.edu/person/nate-newton

Landon M. Mauler

Florida State University - Department of Accounting ( email )

Tallahasse, FL 32306
United States

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