Publication Type

Working Paper

Publication Date

12-2013

Abstract

In this paper, we examine why Chinese reverse merger (RM) firms have lower financial reporting quality. We find that while U.S. RM firms have similar financial reporting quality as matched U.S. IPO firms, Chinese RM firms exhibit lower financial reporting quality than Chinese ADR firms. We further find that Chinese RM firms exhibit lower financial reporting quality than U.S. RM firms. These results indicate that the use of RM process is associated with poor financial reporting quality only in firms from China, where the legal enforcement is weaker than U.S. In addition, we find that compared to Chinese ADR firms, Chinese RM firms have lower CEO turnover performance sensitivity, a measure of bonding incentives, and poorer corporate governance, which in turn explains the lower financial reporting quality in Chinese RM firms. Overall the results suggest that the RM process provides Chinese firms with low bonding incentives and poor governance the opportunity to access the U.S. capital markets, resulting in poor financial reporting quality in Chinese RM firms.

Keywords

Reverse mergers, Chinese firms, China, financial reporting quality, bonding hypothesis, cross-listings

Discipline

Accounting | Asian Studies | Corporate Finance

Research Areas

Corporate Reporting and Disclosure

Embargo Period

2-3-2014

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Comments

The paper was previously titled “Does Foreign Firms’ Shortcut to Wall Street Cut Short Their Financial Reporting Quality? Evidence from Chinese Reverse Mergers.”

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