NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Public Audit Oversight and Reporting Credibility: Evidence from the PCAOB Inspection Regime

Brandon Gipper, Christian Leuz, Mark Maffett

NBER Working Paper No. 21530
Issued in September 2015, Revised in December 2016
NBER Program(s):Asset Pricing, Corporate Finance, Law and Economics

This paper examines how audit oversight by a public-sector regulator affects investors’ assessments of reporting credibility. We analyze whether market responses to unexpected earnings releases increase following the introduction of the Public Company Accounting Oversight Board (PCAOB), as predicted by theory if the new regime enhances reporting credibility. 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 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 is in place. Overall, our results are consistent with public audit oversight increasing the credibility of financial reporting.

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Document Object Identifier (DOI): 10.3386/w21530

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