The Consequences of a Decrease in the Threat of PCAOB’s Inspections and the HFCAA for Chinese Companies

Since 2017, the PCAOB is substantially unable to inspect auditors in Chinese jurisdictions. In 2020, amid growing political and regulatory tensions, the U.S. Congress passed the Holding Foreign Companies Accountable Act (HFCAA) that threatens to delist companies that do not comply with the PCAOB’s inspections regime. Presently, there are more than 200 Chinese companies considered non-compliant, representing 18% of all U.S.-listed foreign companies. I investigate the consequences of a decrease in the threat of PCAOB’s inspections and the incremental effects of the HFCAA. I document three broad findings. First, the U.S. market remains appealing for Chinese companies seeking new financing. Second, a decreased threat of inspections is not associated with a detectable deterioration in Chinese companies’ financial reporting quality and audit quality. Third, the HFCAA did not trigger immediate compliance, but resulted in fifteen companies –with aggregate market capitalization of $468 billion– seeking to list in alternative overseas markets