Real Effects of PCAOB International Inspections

This paper examines the effect of the Public Company Accounting Oversight Board (PCAOB) international inspection program on companies' financing and investing decisions. Difference-in-differences regression estimates suggest that companies respond to their auditor receiving a deficiency-free'' inspection report by issuing additional external capital amounting to 1.4 percent of assets and increasing investment by 0.5 percent of assets. These effects are larger for (1) financially constrained companies and (2) companies located in countries where there is no regulator or the regulator does not conduct inspections. Further, the effect on financing decisions is stronger in countries with (1) low corruption, (2) strong rule of law, and (3) high regulatory quality. Descriptive evidence suggests that inspections increase the use of financial covenants in debt contracts, which is likely one of the mechanisms through which inspections generate real effects. This paper documents the value of PCAOB inspections in mitigating financing frictions for non-U.S. companies.