Investor perception of holding foreign companies accountable act

Abstract

Holding Foreign Companies Accountable Act, passed at the end of 2020, is determined to resolve the US-listed Chinese firms’ non-compliance to the PCAOB’s inspection on the audit working papers. This paper investigates how the investors respond to the passage of HFCAA as well as the subsequent enforcement. Through event study on daily stock returns of US-listed Chinese firms during major points in time related to the HFCAA, this paper shows that the market in general does not deliver a clear sign on Chinese firms upon the passage of HFCAA, beneficial or costly. In contrast, the commission identification has a significantly negative impact on the identified firm’s stock price, while the 2022 PCAOB’s announcement on complete access to Chinese firms’ audit working papers even shows a significant bull sign on the market price of Chinese firms. What’s more, a significantly higher detrended share turnover for Chinese firms post HFCAA suggests more investor differences of opinion. Based on listed firms in the US from 2010 to 2022 and a DID specification, the paper further unveils a positive effect of HFCAA on the stock price crash of Chinese firms, supporting Hong and Stein (2003)’s investor heterogeneity theory that higher investor heterogeneity leads to more stock price crashes. Additionally, triple difference results indicate that high-tech Chinese firms with low financial reporting quality show the lowest level of stock price crashes due to investor consensus. Investor heterogeneity theory, other than the agency theory, better explains the changes in stock price crashes upon HFCAA.