Does the Threat of a PCAOB Inspection Mitigate US Institutional Investors' Home Bias?*

We exploit the staggered introduction of the Public Company Accounting Oversight Board’s (PCAOB) international inspection program to examine the role that exogenous shocks to the stringency of public audit oversight plays in shaping U.S. institutional investors’ home bias. Analyzing a sample of foreign firms listed in the U.S., we evaluate whether U.S. institutional investors hold larger equity stakes in these firms if their auditors are exposed to the threat of a PCAOB inspection. In a differences-in-differences framework, we find that U.S. listed foreign firms enjoy an increase in the number and percentage share ownership of U.S. institutional investors after their auditors become subject to PCAOB inspection access. Cross-sectional analysis implies that the benefit of the PCAOB inspection threat in mitigating U.S. institutional investors’ home bias is concentrated in foreign countries without a strict local audit oversight system. In another series of results, our evidence suggests that the presence of strong institutions governing investor protection and disclosure standards are necessary conditions for U.S. institutional investors to value PCAOB inspection access.