IDEAS home Printed from https://ideas.repec.org/a/bla/joares/v60y2022i3p805-851.html
   My bibliography  Save this article

Do U.S. Investors Value Foreign Component Auditors?

Author

Listed:
  • BINGYI CHEN
  • JENELLE K. CONAWAY

Abstract

We examine whether investors consider foreign component auditors when assessing the value of U.S. multinational corporations (MNCs) using two sets of Public Company Accounting Oversight Board (PCAOB) international regulatory events. We find investors react negatively when the PCAOB is denied access to inspect foreign component auditors in jurisdictions where a U.S. MNC has significant operations and positively when those countries later allow inspection. For foreign component auditors that are inspected, we find investors react positively when they receive clean inspection reports and negatively when they fail to remediate quality control deficiencies. Consistent with PCAOB international oversight providing additional assurance about foreign component auditor quality, our collective results indicate investors consider foreign component auditors when valuing U.S. MNCs.

Suggested Citation

  • Bingyi Chen & Jenelle K. Conaway, 2022. "Do U.S. Investors Value Foreign Component Auditors?," Journal of Accounting Research, Wiley Blackwell, vol. 60(3), pages 805-851, June.
  • Handle: RePEc:bla:joares:v:60:y:2022:i:3:p:805-851
    DOI: 10.1111/1475-679X.12412
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/1475-679X.12412
    Download Restriction: no

    File URL: https://libkey.io/10.1111/1475-679X.12412?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Michael Minnis, 2011. "The Value of Financial Statement Verification in Debt Financing: Evidence from Private U.S. Firms," Journal of Accounting Research, Wiley Blackwell, vol. 49(2), pages 457-506, May.
    2. Steven Shavell & A. Mitchell Polinsky, 2000. "The Economic Theory of Public Enforcement of Law," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 45-76, March.
    3. Lennox, Clive & Pittman, Jeffrey, 2010. "Auditing the auditors: Evidence on the recent reforms to the external monitoring of audit firms," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 84-103, February.
    4. Kim, O & Verrecchia, Re, 1991. "Trading Volume And Price Reactions To Public Announcements," Journal of Accounting Research, Wiley Blackwell, vol. 29(2), pages 302-321.
    5. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 2000. "Investor protection and corporate governance," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 3-27.
    6. Beaver, Wh, 1968. "Information Content Of Annual Earnings Announcements," Journal of Accounting Research, Wiley Blackwell, vol. 6, pages 67-92.
    7. Marcus M. Doxey & James G. Lawson & Thomas J. Lopez & Quinn T. Swanquist, 2021. "Do Investors Care Who Did the Audit? Evidence from Form AP," Journal of Accounting Research, Wiley Blackwell, vol. 59(5), pages 1741-1782, December.
    8. Sattar A. Mansi & William F. Maxwell & Darius P. Miller, 2004. "Does Auditor Quality and Tenure Matter to Investors? Evidence from the Bond Market," Journal of Accounting Research, Wiley Blackwell, vol. 42(4), pages 755-793, September.
    9. DeAngelo, Linda Elizabeth, 1981. "Auditor size and audit quality," Journal of Accounting and Economics, Elsevier, vol. 3(3), pages 183-199, December.
    10. Jere R. Francis & Dechun Wang, 2008. "The Joint Effect of Investor Protection and Big 4 Audits on Earnings Quality around the World," Contemporary Accounting Research, John Wiley & Sons, vol. 25(1), pages 157-191, March.
    11. Scott D. Dyreng & Jeffrey L. Hoopes & Patrick Langetieg & Jaron H. Wilde, 2020. "Strategic Subsidiary Disclosure," Journal of Accounting Research, Wiley Blackwell, vol. 58(3), pages 643-692, June.
    12. Willenborg, M, 1999. "Empirical analysis of the economic demand for auditing in the initial public offerings market," Journal of Accounting Research, Wiley Blackwell, vol. 37(1), pages 225-238.
    13. Christensen, Hans B. & Hail, Luzi & Leuz, Christian, 2013. "Mandatory IFRS reporting and changes in enforcement," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 147-177.
    14. Michael Minnis & Nemit Shroff, 2017. "Why regulate private firm disclosure and auditing?," Accounting and Business Research, Taylor & Francis Journals, vol. 47(5), pages 473-502, July.
    15. Scott D. Dyreng & Bradley P. Lindsey, 2009. "Using Financial Accounting Data to Examine the Effect of Foreign Operations Located in Tax Havens and Other Countries on U.S. Multinational Firms' Tax Rates," Journal of Accounting Research, Wiley Blackwell, vol. 47(5), pages 1283-1316, December.
    16. Luzi Hail & Maximilian Muhn & David Oesch, 2021. "Do Risk Disclosures Matter When It Counts? Evidence from the Swiss Franc Shock," Journal of Accounting Research, Wiley Blackwell, vol. 59(1), pages 283-330, March.
    17. Jenna J. Burke & Rani Hoitash & Udi Hoitash, 2020. "The Use and Characteristics of Foreign Component Auditors in U.S. Multinational Audits: Insights from Form AP Disclosures," Contemporary Accounting Research, John Wiley & Sons, vol. 37(4), pages 2398-2437, December.
    18. DeFond, Mark L., 2010. "How should the auditors be audited? Comparing the PCAOB Inspections with the AICPA Peer Reviews," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 104-108, February.
    19. Brandon Gipper & Christian Leuz & Mark Maffett, 2020. "Public Oversight and Reporting Credibility: Evidence from the PCAOB Audit Inspection Regime," The Review of Financial Studies, Society for Financial Studies, vol. 33(10), pages 4532-4579.
    20. Lamoreaux, Phillip T., 2016. "Does PCAOB inspection access improve audit quality? An examination of foreign firms listed in the United States," Journal of Accounting and Economics, Elsevier, vol. 61(2), pages 313-337.
    21. Beatty, Anne & Chamberlain, Sandra & Magliolo, Joseph, 1996. "An empirical analysis of the economic implications of fair value accounting for investment securities," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 43-77, October.
    22. John C. Coates IV, 2007. "The Goals and Promise of the Sarbanes-Oxley Act," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 91-116, Winter.
    23. Phillip T. Lamoreaux & Landon M. Mauler & Nathan J. Newton, 2020. "Audit Regulation and Cost of Equity Capital: Evidence from the PCAOB's International Inspection Regime," Contemporary Accounting Research, John Wiley & Sons, vol. 37(4), pages 2438-2471, December.
    24. Cooper, David J. & Greenwood, Royston & Hinings, Bob & Brown, John L., 1998. "Globalization and nationalism in a multinational accounting firm: The case of opening new markets in Eastern Europe," Accounting, Organizations and Society, Elsevier, vol. 23(5-6), pages 531-548.
    25. Aobdia, Daniel & Shroff, Nemit, 2017. "Regulatory oversight and auditor market share," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 262-287.
    26. Inder K. Khurana & K. K. Raman, 2006. "Do Investors Care about the Auditor's Economic Dependence on the Client?," Contemporary Accounting Research, John Wiley & Sons, vol. 23(4), pages 977-1016, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Aobdia, Daniel & Shroff, Nemit, 2017. "Regulatory oversight and auditor market share," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 262-287.
    2. Hanlon, Michelle & Shroff, Nemit, 2022. "Insights into auditor public oversight boards: Whether, how, and why they “work”," Journal of Accounting and Economics, Elsevier, vol. 74(1).
    3. Fung, Simon Yu Kit & Raman, K.K. & Zhu, Xindong (Kevin), 2017. "Does the PCAOB international inspection program improve audit quality for non-US-listed foreign clients?," Journal of Accounting and Economics, Elsevier, vol. 64(1), pages 15-36.
    4. Kim, Yongtae & (Nancy) Su, Lixin & (Stephen) Zhou, Gaoguang & (Kevin) Zhu, Xindong, 2020. "PCAOB international inspections and Merger and Acquisition outcomes," Journal of Accounting and Economics, Elsevier, vol. 70(1).
    5. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    6. Christensen, Brant & Lei, Lijun (Gillian) & Shu, Sydney Qing & Thomas, Wayne, 2023. "Does audit regulation improve the underlying information used by managers? Evidence from PCAOB inspection access and management forecast accuracy," Accounting, Organizations and Society, Elsevier, vol. 106(C).
    7. Hans B. Christensen & Luzi Hail & Christian Leuz, 2021. "Mandatory CSR and sustainability reporting: economic analysis and literature review," Review of Accounting Studies, Springer, vol. 26(3), pages 1176-1248, September.
    8. Sarah B. Stuber & Chris E. Hogan, 2021. "Do PCAOB Inspections Improve the Accuracy of Accounting Estimates?," Journal of Accounting Research, Wiley Blackwell, vol. 59(1), pages 331-370, March.
    9. Bley, Jorg & Saad, Mohsen & Samet, Anis, 2019. "Auditor choice and bank risk taking," International Review of Financial Analysis, Elsevier, vol. 61(C), pages 37-52.
    10. Xianjie He & Jeffrey Pittman & Oliver Rui, 2016. "Reputational Implications for Partners After a Major Audit Failure: Evidence from China," Journal of Business Ethics, Springer, vol. 138(4), pages 703-722, November.
    11. El Ghoul, Sadok & Guedhami, Omrane & Pittman, Jeffrey, 2016. "Cross-country evidence on the importance of Big Four auditors to equity pricing: The mediating role of legal institutions," Accounting, Organizations and Society, Elsevier, vol. 54(C), pages 60-81.
    12. Guangming Gong & Liang Xiao & Si Xu & Xun Gong, 2019. "Do Bond Investors Care About Engagement Auditors’ Negative Experiences? Evidence from China," Journal of Business Ethics, Springer, vol. 158(3), pages 779-806, September.
    13. Eli Amir & Yanling Guan & Gilad Livne, 2010. "Auditor Independence and the Cost of Capital Before and After Sarbanes-Oxley: The Case of Newly Issued Public Debt," European Accounting Review, Taylor & Francis Journals, vol. 19(4), pages 633-664.
    14. Dang, Man & Puwanenthiren, Premkanth & Truong, Cameron & Henry, Darren & Vo, Xuan Vinh, 2022. "Audit quality and seasoned equity offerings methods," International Review of Financial Analysis, Elsevier, vol. 83(C).
    15. Friedrich, Christian & Quick, Reiner, 2024. "Do non-audit service failures impair auditor reputation? An analysis of KPMG advisory service scandals in Germany," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 98(C).
    16. Thomas Bourveau & Janja Brendel & Jordan Schoenfeld, 2024. "Decentralized Finance (DeFi) assurance: early evidence," Review of Accounting Studies, Springer, vol. 29(3), pages 2209-2253, September.
    17. Palazuelos Cobo, Estefanía & Montoya del Corte, Javier & Herrero Crespo, Ángel, 2017. "Determinantes de la continuidad en la contratación de la auditoría de forma voluntaria: evidencia para el caso de España," Revista de Contabilidad - Spanish Accounting Review, Elsevier, vol. 20(1), pages 63-72.
    18. Phillip T. Lamoreaux & Landon M. Mauler & Nathan J. Newton, 2020. "Audit Regulation and Cost of Equity Capital: Evidence from the PCAOB's International Inspection Regime," Contemporary Accounting Research, John Wiley & Sons, vol. 37(4), pages 2438-2471, December.
    19. Löhlein, Lukas, 2016. "From peer review to PCAOB inspections: Regulating for audit quality in the U.S," Journal of Accounting Literature, Elsevier, vol. 36(C), pages 28-47.
    20. Quick, Reiner & Schmidt, Florian, 2018. "Do audit firm rotation, auditor retention, and joint audits matter? – An experimental investigation of bank directors' and institutional investors' perceptions," Journal of Accounting Literature, Elsevier, vol. 41(C), pages 1-21.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:joares:v:60:y:2022:i:3:p:805-851. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0021-8456 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.