SEO Underpricing and PCAOB Inspection Reports: Do Investors Use PCAOB Inspection Information?

• In Event: PCAOB Inspections

Abstract

We examine the link between Public Company Accounting Oversight Board (PCAOB) Inspection Reports and a firm’s cost of equity capital. We do so by investigating the relation between seasoned equity offering (SEO) underpricing and PCAOB inspection reports, with a particular focus on the clients of triennially-inspected auditors. SEO underpricing occurs when the SEO’s offer price is lower than the prior day’s market price of the firm’s shares, and it represents ‘money left on the table’ for issuing firms. SEO underpricing is a non-trivial cost to an issuing firm, and its occurrence is increasing in both frequency and magnitude. We document a statistically and economically significant negative association between SEO underpricing and the use of a triennially-inspected auditor that has received a ‘clean’ PCAOB inspection report. Our evidence suggests that market participants find the inspection reports informative about audit quality for triennially-inspected auditors. We conduct similar analyses for SEOs administered by firms employing large, annually-inspected auditors and who generally do not document a relation between inspection reports and SEO underpricing, suggesting that the dominant effect is auditor brand name in this environment.

Authors

• William L Buslepp, Louisiana State University

• Lawrence J Abbott, University of Wisconsin-Milwaukee

• Laura Swenson, University of Wisconsin-Milwaukee

• James Robert Moon, Georgia State University