Financial Reporting Quality of Chinese Reverse Merger Firms: The Reverse Merger Effect or the China Effect?

63 Pages Posted: 15 Mar 2016

See all articles by Kun-Chih Chen

Kun-Chih Chen

National Taiwan University - Department of Accounting

Qiang Cheng

Singapore Management University

Ying Chou Lin

Southeastern Oklahoma State University - Department of Accounting and Finance

Yu-Chen Lin

National Cheng Kung University - Accounting

Xing Xiao

Tsinghua University

Multiple version iconThere are 2 versions of this paper

Date Written: December 10, 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, bonding hypothesis, cross-listings, financial reporting quality

JEL Classification: G15, G24, G34, G38

Suggested Citation

Chen, Kun-Chih and Cheng, Qiang and Lin, Ying Chou and Lin, Yu-Chen and Xiao, Xing, Financial Reporting Quality of Chinese Reverse Merger Firms: The Reverse Merger Effect or the China Effect? (December 10, 2013). Available at SSRN: https://ssrn.com/abstract=2043899 or http://dx.doi.org/10.2139/ssrn.2043899

Kun-Chih Chen (Contact Author)

National Taiwan University - Department of Accounting ( email )

85
Sec 4 Roosevelt Rd.
Taipei, 106
Taiwan

Qiang Cheng

Singapore Management University ( email )

60 Stamford Road
Singapore, 178900
Singapore

Ying Chou Lin

Southeastern Oklahoma State University - Department of Accounting and Finance ( email )

1405 N. 4th
Durant, OK 74701
United States

Yu-Chen Lin

National Cheng Kung University - Accounting ( email )

1 Ta-Hsueh Road
Tainan, 701
Taiwan
+886-6-2757575 ext.53442 (Phone)
+886-6-2744104 (Fax)

Xing Xiao

Tsinghua University ( email )

Beijing, 100084
China

Register to save articles to
your library

Register

Paper statistics

Downloads
767
Abstract Views
3,955
rank
220,971
PlumX Metrics