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

Posted: 31 Mar 2020

See all articles by Phillip T. Lamoreaux

Phillip T. Lamoreaux

Arizona State University

Landon M. Mauler

Florida State University - Department of Accounting

Nathan J. Newton

Florida State University

Date Written: March 10, 2020

Abstract

This study investigates the relation between audit regulation and cost of equity capital. There is scant empirical evidence on this relation 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. Furthermore, we find that this cost of capital effect is attenuated for companies with higher quality 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

Suggested Citation

Lamoreaux, Phillip T. and Mauler, Landon M. and Newton, Nathan J., Audit Regulation and Cost of Equity Capital: Evidence from the PCAOB’s International Inspection Regime (March 10, 2020). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3555143

Phillip T. Lamoreaux

Arizona State University ( email )

Tempe, AZ 85287
United States

Landon M. Mauler

Florida State University - Department of Accounting ( email )

Tallahasse, FL 32306
United States

Nathan J. Newton (Contact Author)

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

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