Working Paper: NBER ID: w21530
Authors: Brandon Gipper; Christian Leuz; Mark Maffett
Abstract: This paper studies the impact of public audit oversight on financial reporting credibility. We analyze changes in market responses to earnings news after public audit oversight is introduced, exploiting that the regime onset depends on fiscal year-ends, auditors, and the rollout of auditor inspections. We find that investors respond more strongly to earnings news following public audit oversight. Corroborating these findings, we find an increase in volume responses to 10-K filings after the new regime. Our results show that public audit oversight can enhance reporting credibility and that this credibility is priced in capital markets.
Keywords: audit oversight; financial reporting; PCAOB; reporting credibility
JEL Codes: G14; G18; G38; K22; M41; M42; M48
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reporting credibility (C59) | investors respond more strongly to earnings news (G14) |
| PCAOB regime (G38) | reporting credibility (C59) |
| PCAOB regime (G38) | earnings response coefficient (ERC) (M12) |
| PCAOB limited inspections in 2003 (G38) | ERCs increase (R59) |
| PCAOB full inspections in 2004 (G38) | ERCs increase (R59) |
| PCAOB regime (G38) | abnormal trading volume (G14) |