Does Auditing Shape Global Value Chains? Evidence from PCAOB Inspections

67 Pages Posted: 24 Jun 2022

See all articles by Sibo Liu

Sibo Liu

Hong Kong Baptist University

Lixin (Nancy) Su

Hong Kong Polytechnic University - School of Accounting and Finance

Kevin ZHU

City University of Hong Kong (CityU) - Department of Accountancy

Date Written: April 5, 2022

Abstract

This study investigates how a financial market mechanism, auditing, shapes a firm's engagement in global value chains and product choice. We examine the effect of the Public Company Accounting Oversight Board's (PCAOB) inspections on non-U.S. auditors, which induce higher reporting quality of the global exporters audited by these auditors. Using a unique data set of U.S. waterway imports from global suppliers from 36 countries and adopting a Difference-in-Differences design, we find that the PCAOB inspections not only lead to more exports to U.S. buyers among treated global suppliers particularly for intermediate goods and capital goods, treated firms also upgrade their product complexity and attract more large buyers. The positive effect of PCAOB inspections is stronger for firms with ex-ante lower reporting quality, firms with lower market share, firms operating in more competitive product markets, and firms located in countries with weaker institutions and lower political stability. PCAOB inspections also benefit exporters more when tariff reductions occur over time. Our findings suggest that regulatory oversight on auditing facilitates firms' participation in global value chains by lifting professional service quality that reduces search and contractual frictions in cross-border transactions.

Keywords: Information quality, global value chains, financial report, auditing

JEL Classification: F14, G14, G15, M41, M42

Suggested Citation

Liu, Sibo and Su, Lixin (Nancy) and ZHU, Kevin, Does Auditing Shape Global Value Chains? Evidence from PCAOB Inspections (April 5, 2022). Available at SSRN: https://ssrn.com/abstract=4131892 or http://dx.doi.org/10.2139/ssrn.4131892

Sibo Liu (Contact Author)

Hong Kong Baptist University ( email )

Renfrew Road 34
Kowloon Tong
Hong Kong

Lixin (Nancy) Su

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong
852-2766-7033 (Phone)
852-2330-9845 (Fax)

Kevin ZHU

City University of Hong Kong (CityU) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

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