Does the Threat of a PCAOB Inspection Mitigate US Institutional Investors’ Home Bias?

Posted: 3 Jun 2021

See all articles by Yue He

Yue He

Shanghai University of Finance and Economics

Bing Li

City University of Hong Kong (CityU)

Zhenbin Liu

Hong Kong Baptist University

Jeffrey Pittman

Memorial University ; Virginia Tech

Date Written: May 21, 2021

Abstract

We exploit the staggered introduction of the PCAOB’s international inspection program to examine the role that the stringency of public audit oversight plays in shaping US institutional investors’ home bias. Analyzing a sample of foreign firms listed in the United States, we evaluate whether US institutional investors hold larger equity stakes in these firms―a longstanding issue that reflects investor portfolio decisions―if their auditors are exposed to the threat of a PCAOB inspection. In a differences-in-differences framework, we find that US listed foreign firms enjoy an increase in US institutional investors’ equity positions after their auditors become subject to PCAOB inspection access. Cross-sectional analysis implies that the benefit of the PCAOB inspection threat in mitigating US institutional investors’ home bias is concentrated in: foreign countries without a strict local audit oversight system; active US institutional investors that are known to value accounting transparency; and firms from countries that grant PCAOB access later (after the onset of its international inspection program in 2005). Our evidence suggests that foreign firms become better known in the capital markets under the PCAOB inspection program, which induces US institutional investors to acquire larger equity stakes in US listed foreign firms given the lower information asymmetry that ensues under the PCAOB inspection threat.

Keywords: PCAOB inspection, audit quality, US institutional investors, home bias, inspection threat

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 US Institutional Investors’ Home Bias? (May 21, 2021). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3858418

Yue He

Shanghai University of Finance and Economics ( email )

School of Accountancy
No.777 Guoding Road, Yangpu District
Shanghai, Shanghai 200433
China

Bing Li

City University of Hong Kong (CityU) ( 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 ( email )

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

Virginia Tech ( email )

United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
287
PlumX Metrics