The Valuation Impact of PCAOB International Inspections on U.S. Multinational Corporations

Abstract

Although the Sarbanes-Oxley Act of 2002 mandates that all auditors of public issuers in the United States are subject to Public Company Accounting Oversight Board (PCAOB) inspection, certain foreign jurisdictions prevent the PCAOB from inspecting their audit firms. Between January 2011 and November 2017, the PCAOB issued a series of 16 disclosures announcing Cooperative Agreements with foreign regulators who previously prohibited PCAOB inspections. We exploit the staggered introduction of the PCAOB international inspection program to examine whether PCAOB cross-border audit oversight affects the valuation of U.S. Multinational Corporations (MNCs). Specifically, we examine the returns of U.S. MNCs with substantial operations in certain foreign countries to news about auditors from those countries not being, and then becoming, subject to PCAOB inspection. We document a significantly negative (positive) market reaction to news that the PCAOB does not have (subsequently gains) access to inspect certain foreign participating auditors. Consistent with cross-sectional predictions, we find the valuation impact is stronger for U.S. MNCs with weaker external monitoring, greater overseas presence, and foreign operations in countries with poorer investor protections. Overall, the results are consistent with investors valuing PCAOB regulatory oversight abroad.