We exploit the staggered introduction of the PCAOB's international inspection program to examine the role that the stringency of public audit oversight plays in shaping US institutional investors' home bias. Analyzing a sample of foreign firms listed in the United States, we evaluate whether US institutional investors hold larger equity stakes in these firms—a longstanding issue that reflects investor portfolio decisions—if their auditors are exposed to the threat of a PCAOB inspection. In a differences‐in‐differences framework, we find that US‐listed foreign firms enjoy an increase in US institutional investors' equity positions after their auditors become subject to PCAOB inspection access. Cross‐sectional analysis implies that the benefit of the PCAOB inspection threat in mitigating US institutional investors' home bias is concentrated in foreign countries without a strict local audit oversight system; active US institutional investors that are known to value accounting transparency; and firms from countries that grant PCAOB access later (after the onset of its international inspection program in 2005). Our evidence suggests that foreign firms become better known in the capital markets under the PCAOB inspection program, which induces US institutional investors to acquire larger equity stakes in US‐listed foreign firms given the lower information asymmetry that ensues under the PCAOB inspection threat.

We examine whether the strength of internal control over financial reporting (internal control) reduces the expropriation of resources from the firm by managers and controlling shareholders. Although we have ample evidence from prior literature that internal controls reduce errors in financial reports, it is less clear that they can curb resource extraction, because management may fail to enforce these controls. Exploiting the setting of China, where we have a rich internal control data set and established measures of resource extraction, we provide evidence consistent with internal controls curbing resource extraction on average. In particular, we document a negative association between internal control strength and resource extraction. We also find that the association between internal control strength and resource extraction is weaker in settings where we expect management to have fewer incentives to enforce these controls: within state‐owned firms and within non‐state‐owned firms that have a powerful controlling shareholder. We interpret these results as suggesting that internal controls must both exist and be enforced by management for the controls to safeguard assets. Although the analyses are conducted using Chinese data, we expect the spirit of our findings to generalize to other settings—management can “window dress” internal control procedures while still engaging in undesirable behavior.