Does auditor regulatory oversight affect corporate financing and investment decisions?

This paper examines the real effects of auditor regulatory oversight on companies’ financing and investing policies. Using the Public Company Accounting Oversight Board’s (PCAOBs) international inspection program as a setting to generate within-country variation in auditor oversight, I find that companies respond to the increase in auditor oversight by issuing additional external capital amounting to 0.5% of assets and increasing capital expenditures by 0.3% of assets. These effects are larger for financially constrained companies and weaker for companies whose auditors’ are criticized by the PCAOB for having deficient engagement practices. This paper documents the importance of auditor oversight in mitigating external financing frictions. This paper is a finalist for the American Accounting Association 2016 FARS Midyear Meeting Best Paper Award. I thank Daniel Aobdia, Phil Berger, Beth Blankespoor, John Coates (discussant), Maria Correia (discussant), Lisa De Simone, Michelle Hanlon, Jonas Heese (discussant), Andrew Karolyi (discussant), Jinhwan Kim, Robert Knechel Becky Lester, Mark Maffett (discussant), Karen Ton, Rodrigo Verdi, and seminar participants at the Chinese University of Hong Kong, 2015 Dartmouth Accounting Research Conference, Erasmus University, 2016 FARS conference, HKUST, Indian School of Business, 2016 London School of Economics Conference, MIT, Ohio State University, 2015 PCAOB/JAR Conference, PCAOB Center for Economic Analysis, Singapore Management University, Southern Methodist University, Stanford University, University of Amsterdam, University of Chicago, University of Missouri, University of North Carolina, University of Texas, Austin Capital Markets Reading Group and the 2017 University of Toronto Conference for many helpful comments and suggestions. I thank Niketa Shroff for help with data collection. I acknowledge financial support from the MIT Junior Faculty Research Assistance Program. An earlier draft of this paper was entitled “Real Effects of Financial Reporting Quality and Credibility: Evidence from the PCAOB Regulatory Regime.” All errors are my own.