Working Paper: Market-Based Incentives Audit Quality

Paper Authors: Andrew Acito, Amir Amel-Zadeh, James Anderson, William Anderson, Daniel Aobdia, Thomas Bourveau, Francois Brochet, Huaizhi Chen, Jonathan Fluharty-Jaidee, Martin Schmalz, Manyun Tang, Scott J. Wang, Joshua T. White, and William Zame

Abstract: We examine how investors respond to public inspection reports issued by the U.S. audit regulator. Our analysis exploits variation in company identifiability, where small client portfolios make inspection outcomes quasi company-specific. Using hand-collected publication dates and an event-study design, we find that identifiable companies experience positive abnormal returns following non-deficient inspection outcomes and negative returns following deficient ones. In contrast, companies that cannot be linked to specific inspection results show no price response. The return differentials persist across a battery of robustness tests and are stronger when inspection information is more timely. Overall, our findings show that markets incorporate audit-quality information when inspection outcomes can be credibly mapped to individual companies, suggesting that greater transparency enhances the informational role of audit oversight and strengthens market-based incentives for audit quality.

Download the paper

Disclaimer

The economic research fellows and staff economists generate high-quality working papers that inform the oversight activities of the PCAOB and are disseminated to stimulate discussion and critical comment to the benefit of the public. Working papers are preliminary materials that have not been approved by the Board and reflect only the views of the author(s).

The research topics of economic research fellows, including a description of any nonpublic data sets required for research, are presented to the Board for approval and research papers are reviewed to confirm that the topic of the paper is consistent with the researcher's proposal. That review does not, however, encompass an evaluation of the conclusions reached by researchers.