The PCAOB International Inspections Regime and Debt Contracting: Evidence from American Depositary Receipt Firms

• In Event: Other Issues in Auditing

Abstract

We study the role of auditors’ assurance in debt contracting by exploiting foreign governments’ staggered adoption of the Public Company Accounting Oversight Board’s (PCAOB) international inspection program as a quasi-natural experiment. We examine the use of financial covenants in bank loan contracts using a sample of American Depositary Receipt (ADR) borrowers whose auditors are from foreign jurisdictions that may or may not allow PCAOB inspection access. We find that PCAOB inspection access leads to an increase in the use of financial covenants in debt contracts but no increase in the use of non-financial covenants after controlling for the presence of a local auditor oversight body, suggesting that PCAOB oversight improves the contractibility of accounting numbers in the private debt market. We uncover the underlying channels by analyzing the impact of foreign institutions and find that the increased contractibility of accounting numbers is concentrated in jurisdictions with weaker auditor legal lability and law enforcement. We also find that PCAOB inspection access results in more diffuse loan syndicates. Collectively, the evidence suggests that creditors believe that PCAOB regulatory oversight improves the debt contracting value of accounting information.

Authors

• Huichi Huang, North Dakota State University

• Yutao Li, University of Lethbridge