Chinese auditor inspection access challenges: The market’s response to integrated US regulatory and legislative action

Abstract

We examine the impact of mounting regulator interest in US-listed Chinese firms facing PCAOB inspection access challenges. Our study provides evidence of the market’s response to five events taking place from 2018 to 2020. Collectively, these events mark the first-ever integrated regulatory and legislative response from the PCAOB, SEC, and US legislature since initiation of the PCAOB’s international inspection program. First, we consider whether the PCAOB’s eighth annual update of inaccessible jurisdictions is newsworthy to investors. Next, we consider investors’ perceptions of audit quality risks and delisting risks among Chinese firms. We find that the market does respond negatively towards cross-listed Chinese firms following PCAOB, SEC, and US legislative action. Results further suggest that market reactions are motivated by investors’ perception of a delisting risk among Chinese firms. This observation is most salient among small Chinese firms having fewer listing alternatives outside of the US.