Abstract
Over the past 15 years, the PCAOB has faced shifting barriers to secure unrestricted access to inspect Chinese audits, reflecting the increasingly complex US-China relations. I examine variation in the likelihood of PCAOB inspection access, focusing on two critical events: a memorandum of understanding (MOU) in 2013 (which increased the likelihood of access) and a break of cooperation (BOC) in 2017 (which decreased such likelihood). Following the 2013 MOU, smaller Chinese companies are increasingly likely to list in Hong Kong rather than in the US, consistent with marginal companies facing difficulties to absorb the incremental compliance costs associated with heightened probability of inspection. Subsequently, after the 2017 BOC, politically sensitive Chinese companies are more likely to list in Hong Kong, consistent with companies with sensitive information facing more substantial penalties from the US market associated with reduced probability of inspection. Finally, US-listed Chinese companies have not experienced a detectable variation in audit quality throughout this period, inconsistent with the notion that a cross- border inspection agreement, without accompanying enforcement measures, directly impacts the audit quality of US-listed foreign companies. Overall, for Chinese companies, the variation in the likelihood of PCAOB oversight seems to have more immediate consequences for the appeal of the US market than for audit quality.