The Association between PCAOB Inspection Reports and SEO Discounting

Abstract

We examine the association between Public Company Accounting Oversight Board (PCAOB) inspection reports and a firm’s cost of equity capital, measured using seasoned equity offering (SEO) discounting. SEO discounting occurs when the offer price is lower than the prior day’s market price of the firm’s shares and represents ‘money left on the table’ for issuing firms. We document an economically significant, positive association between SEO discounting and the use of an auditor found to be deficient by the PCAOB for clients of triennially inspected auditors. Cross-sectional evidence suggests that, for clients of triennially inspected auditors, this relation is stronger for clients with lower analyst following, with disclosed material weaknesses in financial reporting controls, and weaker if the auditor issues a going concern report modification. Our evidence  suggests that deficiencies for reports issued in the 2 years prior to the SEO positively relate to discounting, whereas older inspection results do not.