I examine whether financial reporting quality and credibility affect a company’s financing and investment decisions. I use PCAOB inspections of non-U.S. auditors as exogenous shocks to the reporting quality of non-U.S. companies audited by PCAOB inspected auditors. I then use the subsequent public revelation of the inspection as exogenous shocks to the reporting credibility of non-U.S. companies that employ PCAOB inspected auditors. Using a difference-indifferences design, I find that although PCAOB inspections improve accrual quality for non-U.S. companies audited by the inspected auditors, there is no evidence that these improvements in accrual quality lead to changes in investment, investment efficiency or debt financing. However, I find that when PCAOB inspection reports are subsequently made public, non-U.S. companies audited by PCAOB inspected auditors increase their long-term debt (investment) by 11.5% (10.9%) and become more responsive to their investment opportunities. These effects are stronger for financially constrained companies and companies with non-big four auditors. Overall, the evidence in this paper suggests that regulatory oversight of the auditor helps improve reporting credibility, which in turn facilitates corporate investment by increasing companies’ external financing capacity.
| Speaker: | Dr Nemit Shroff Associate Professor, Massachusetts Institute of Technology |
| When: |
3.30 - 5.00pm |
| Venue: | School of Accountancy Level 3, Seminar Room 3.1 |
| Contact: | Office of the Dean Email: SOAR@smu.edu.sg |