Has PCAOB oversight increased firms’ use of real earnings management?

Prior research highlights the positive effects of PCAOB oversight on reporting and audit quality. However, to gain a clear understanding of the net benefits of regulation, it is important to also investigate corresponding costs. We investigate the relation between PCAOB inspection oversight and real earnings management (REM), a potentially value-destroying activity. We exploit the staggered timing of foreign governments’ allowance of PCAOB inspections in a generalized difference-in-differences design and find that companies engage in greater REM during periods of PCAOB inspection oversight. We find that this relation is stronger for companies that faced a reduced ability to manage earnings via accruals and that firms become more likely to meet earnings benchmarks through the use of REM subsequent to PCAOB oversight. Lastly, we find a negative association between PCAOB oversight and firm innovation. Collectively, our findings highlight a trade-off between improved audit quality and real costs of auditor regulatory oversight