Public Oversight and Reporting Credibility: Evidence from the PCAOB Audit Inspection Regime
This paper examines how audit oversight by a public sector regulator affects investors' assessments of reporting credibility. We analyze whether the introduction of the Public Company Accounting Oversight Board (PCAOB) and its inspection regime have strengthened capital market responses to unexpected earnings releases, as theory predicts when reporting credibility increases. To identify the effects, we use a difference in differences design that exploits the staggered introduction of the inspection regime, which affects firms at different points in time depending on their fiscal year ends, auditors, and the timing of PCAOB inspections. We find that capital market responses to unexpected earnings increase significantly following the introduction of the PCAOB inspection regime. Corroborating these findings, we also find an increase in abnormal volume responses to firms' 10 K filings after the new regime. Overall, our results are consistent with public audit oversight increasing the credibility of financial reporting.