Audit Regulation and Cost of Equity Capital: Evidence from the PCAOB's International Inspection Regime*

Phillip T. Lamoreaux, Landon M. Mauler, Nathan J. Newton

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

Abstract

This study investigates the relation between audit regulation and cost of equity capital. There is scant empirical evidence on this relation because changes in audit regulation are frequently accompanied by other major regulatory changes. We exploit variation in the timing of regulatory changes induced by foreign governments' staggered allowance of PCAOB inspections. Using a difference-in-differences design, we find that foreign SEC registrants with auditors from countries that allow PCAOB inspections enjoy a lower cost of capital, relative to foreign SEC registrants with auditors from countries that prohibit inspections. Furthermore, we find that this cost of capital effect is attenuated for companies with higher-quality governance mechanisms. Finally, we document that inspection access is associated with higher-quality analyst forecasts, which suggests that this change in audit regulation reduces information risk for market participants.

Original languageEnglish (US)
Pages (from-to)2438-2471
Number of pages34
JournalContemporary Accounting Research
Volume37
Issue number4
DOIs
StatePublished - Dec 1 2020
Externally publishedYes

Keywords

  • audit regulation
  • cost of capital
  • international
  • PCAOB

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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