The Value of the PCAOB’s International Audit Oversight on U.S. listed Foreign Companies : Evidence from an Initial Enforcement Breakdown

We use the release by the Public Company Accounting Oversight Board on May 18, 2010 showing its oversight of certain foreign auditors has been denied as a natural experiment to examine investors’ early valuation of the PCAOB’s international audit oversight on U.S. listed foreign companies. By comparing reactions of the release-exposed foreign companies to reactions of other U.S. listed foreign companies, we find a significant decline in share values of the release-exposed companies. Nevertheless, the decline was driven by companies with auditors from China. The on-list companies from the 19 on-list European jurisdictions did not experience significantly negative stock market reactions. Consistent with the results for the stock market reaction analyses, we find a decline in the perceived financial reporting quality of the foreign listings from China but not the exposed companies from the 19 on-list European jurisdictions using difference-in-differences analyses of earnings response coefficients, abnormal stock returns and volumes surrounding earnings announcements, and analyst forecast dispersions. These results are consistent with the view that the PCAOB’s international inspection would create a net value for U.S. listed companies from China