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PCAOB international inspection access and debt contracting: Evidence from American Depositary Receipt firms |
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| Affiliation: | 1. College of Business, North Dakota State University, 811 2nd Ave. N., Fargo, ND 58108-6050, USA;2. Dhillon School of Business, University of Lethbridge, 345 – 6 Ave S.E., Calgary, Alberta T2G 4V1, Canada;1. Southern Illinois University Carbondale, United States;2. DePaul University, United States;3. Louisiana Tech University, United States;1. Mendoza College of Business, University of Notre Dame, Notre Dame, IN 46556, United States;2. Ohio University College of Business, Ohio University, Athens, OH 45701, United States;1. Lynn Pippenger School of Accountancy, Muma College of Business, University of South Florida, 4202 East Fowler Ave., BSN 3403, Tampa, FL 33620, United States;2. Department of Accounting and Finance, Paul College of Business and Economics, University of New Hampshire, 11 Garrison Ave., Durham, NH 03824, United States;1. School of Public Finance and Taxation, Central University of Finance and Economics, Beijing 100081, China;2. Department of Finance, School of Economics, Huazhong University of Science and Technology, Wuhan 430074, China;3. School of Business, East China University of Science and Technology, Shanghai 200237, China |
| Abstract: | We examine whether the Public Company Accounting Oversight Board’s (PCAOB’s) international inspection access affects the usage of accounting-based debt covenants in bank loan contracts of American Depositary Receipt (ADR) borrowers. We show that there is an increase in the use of financial covenants in debt contracts after the auditor of an ADR borrower becomes subject to PCAOB inspections. We also document that lenders increase the usage of financial covenants only in loans to ADR borrowers domiciled in countries with weak home country intuitions, and the increase is more pronounced for ADR borrowers from countries without a local auditor regulatory oversight body. These findings suggest that PCAOB regulatory oversight enhances the perceived credibility of accounting numbers for debt contracting and serves as a substitute for the weak monitoring of auditors for ADR borrowers domiciled in countries with weak country institutions. |
| Keywords: | PCAOB international inspection access Debt contracting Financial covenants Cross-listed foreign firms Weak country institutions |
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