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Working Paper

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Our study documents a “Lemons” market failure of Chinese firms listed in the US in 2011 and a subsequent rebound by 2013. Our tests reveal that there was little difference in ex ante observable characteristics of fraudulent and non-fraudulent Chinese firms listed in the US prior to 2011 while entrepreneurs appear to have known their type. We document substantial costs of dishonesty and the failure of traditional market signaling mechanisms such as auditor or underwriter quality. We also show a return of Chinese firms after US and Chinese regulatory intervention in 2013 although this intervention was insufficient to fundamentally change the character of this market. Importantly, we find that factors capturing ex post settling up costs such as North America sales and CEO’s US education reduced the probability of financial fraud. Our results support the importance of legal and regulatory institutions as a necessary condition for properly functioning capital markets.


Chinese Firms, IPOs, Frauds, Lemons market, Information Asymmetry


Asian Studies | Marketing

Research Areas

Financial Performance Analysis

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City or Country

Singapore Management University

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.

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