2015-16 IGM Year in Review

27 PUBLIC AUDIT OVERSIGHT AND REPORTING CREDIBILITY: EVIDENCE FROM THE PCAOB INSPECTION REGIME This paper examines how audit oversight by a public-sector regulator affects investors’ assessments of reporting credibility. We analyze whether the introduction of the Public Company Accounting Oversight Board (PCAOB) and its inspection regime have strengthened capital-market responses to unexpected earnings releases, as theory predicts when reporting credibility increases. To identify the effects, we (Leuz, Maffett and coauthor Brandon Gipper) use a difference-in-differences design that exploits the staggered introduction of the inspection regime, which affects firms at different points in time depending on their fiscal yearends, auditors, and the timing of PCAOB inspections. We find that capital-market responses to unexpected earnings increase significantly following the introduction of the PCAOB inspection regime. Corroborating these findings, we also find an increase in abnormal volume responses to firms’ 10-K filings after the new regime. Overall, our results are consistent with public audit oversight increasing the credibility of financial reporting. Christian Leuz Joseph Sondheimer Professor of International Economics, Finance and Accounting Mark G. Maffett Assistant Professor of Accounting