Good Apples, Bad Apples: Sorting Among Chinese Companies Traded in the US

42 Pages Posted: 20 Mar 2012 Last revised: 14 Jun 2014

See all articles by James S. Ang

James S. Ang

Florida State University; Florida State University - College of Law

Zhiqian Jiang

Xiamen University - School of Management

Chaopeng Wu

Xiamen University - School of Management

Date Written: January 29, 2014

Abstract

Committing financial fraud is a serious breach of business ethics. However, there are few large scale studies of financial fraud that involve ethical considerations. In this study, we investigate the pervasive financial scandals, which by the end of 2012 involved more than a third of the U.S.-listed Chinese companies. Based on a sample of 262 U.S.-listed Chinese companies, we analyze factors that differentiate between firms that commit financial fraud and those that do not. We find that firms more predisposed to unethical behavior, due to their low regional social trust in the home country and low respect for regulations and laws as proxied by political connections, are more likely to commit accounting and financial fraud. They take advantage of low hurdles for listing via reverse mergers and avoid third-party monitoring through poor governance and auditors. Finally, we find evidence after these scandals of non-fraudulent firms differentiating themselves from the fraudulent firms by sending costly signals such as insiders purchasing shares, increasing dividends, and going private.

Keywords: financial fraud; overseas listing; reverse merger; U.S.-listed Chinese companies

JEL Classification: G24

Suggested Citation

Ang, James S. and Jiang, Zhiqian and Wu, Chaopeng, Good Apples, Bad Apples: Sorting Among Chinese Companies Traded in the US (January 29, 2014). Available at SSRN: https://ssrn.com/abstract=2024826 or http://dx.doi.org/10.2139/ssrn.2024826

James S. Ang

Florida State University ( email )

College of Business
Tallahassee, FL 32306-1042
United States
904-644-8208 (Phone)

Florida State University - College of Law ( email )

425 W. Jefferson Street
Tallahassee, FL 32306
United States

Zhiqian Jiang

Xiamen University - School of Management ( email )

No.422 Siming Nan Road
Xiamen, Fujian 361005
China

Chaopeng Wu (Contact Author)

Xiamen University - School of Management ( email )

No.422 Siming Nan Road
Xiamen, Fujian 361005
China

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