Publication Type

Journal Article

Version

submittedVersion

Publication Date

9-2016

Abstract

In this paper, we examine why Chinese reverse merger (RM) firms have lower financial reporting quality than U.S. IPO firms. We find that the financial reporting quality of U.S. RM firms is similar to that of matched U.S. IPO firms, but Chinese RM firms exhibit lower financial reporting quality than Chinese ADR firms. We also find that Chinese RM firms exhibit lower financial reporting quality than U.S. RM firms. These results indicate that the use of the RM process is associated with poor financial reporting quality only in firms from China, where legal enforcement and investor protection are weak. In addition, we find that compared with Chinese ADR firms, Chinese RM firms have weaker bonding incentives (as measured by CEO turnover-performance sensitivity) and poorer corporate governance. These factors in turn contribute to the lower financial reporting quality of Chinese RM firms. Overall, our results suggest that the less-scrutinized RM process allows Chinese firms with weak bonding incentives and poor governance to gain access to U.S. capital markets, resulting in poor financial reporting quality.

Keywords

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

Discipline

Accounting | Asian Studies | Corporate Finance

Research Areas

Corporate Reporting and Disclosure

Publication

Accounting Review

Volume

91

Issue

5

First Page

1363

Last Page

1390

ISSN

0001-4826

Identifier

10.2308/accr-51376

Publisher

American Accounting Association

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.2308/accr-51376

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