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

​​​​​Paper Authors: Brandon Gipper, Christian Leuz, and Mark Maffett

Publication: The Review of Financial Studies

Abstract: This paper examines how regulatory oversight of the audit profession affects investors’ assessments of reporting credibility and trust in financial reporting. We analyze whether market responses to earnings news increase after the introduction of the Public Company Accounting Oversight Board (PCAOB), as predicted by theory if such oversight enhances reporting credibility. We use a generalized difference-in-differences design and exploit the fact that the new regime affects firms at different points in time, depending on their fiscal year-ends, auditors, and the rollout of auditor inspections, to disentangle regime effects from other macro and regulatory changes. We find that investors respond more strongly to earnings news following PCAOB oversight. Corroborating these findings, we also find an increase in volume responses to firms’ 10-K filings after the new regime is in place. Overall, our results are consistent with regulatory oversight of the audit profession increasing investor trust and reporting credibility, relative to the prior peer review.