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Private Class Action Litigation Risk of Chinese Firms Listed in the U.S.

Charles A. Dice Center Working Paper No. 2012-18

Fisher College of Business Working Paper No. 2012-03-018

25 Pages Posted: 14 Jul 2012 Last revised: 26 Mar 2016

Jan Jindra

U.S. Securities and Exchange Commission - Division of Economic and Risk Analysis

Torben Voetmann

The Brattle Group; University of San Francisco

Ralph A. Walkling

Drexel University - Lebow College of Business

Date Written: March 25, 2016

Abstract

We analyze the litigation risk of Chinese firms listed in the U.S. We find that firm-specific characteristics from prior literature studying U.S. firms are not correlated with the litigation risk of U.S.-listed Chinese firms. However, our findings indicate that the method of listing is the only reliable predictor of litigation risk –– firms listing via reverse merger are significantly more likely to face lawsuits compared to firms listing via IPO. We find that Chinese reverse merger (CRMs) firms, relative to Chinese IPOs, have lower analyst following, similar post-listing stock performance, higher operating cash flows, smaller size, and lower cash holdings. We conclude that the litigation risk differential is consistent with the bonding hypothesis of Stulz (1999), wherein the higher litigation risk of CRMs is a reflection of increased but varying levels of monitoring, starting with the regulatory oversight at the pre-listing stage and a post-listing tradeoff between enforcement and monitoring by shareholders.

Keywords: Cross-listing, China, reverse merger, initial public offering, securities class action lawsuits

JEL Classification: G14

Suggested Citation

Jindra, Jan and Voetmann, Torben and Walkling, Ralph A., Private Class Action Litigation Risk of Chinese Firms Listed in the U.S. (March 25, 2016). Charles A. Dice Center Working Paper No. 2012-18; Fisher College of Business Working Paper No. 2012-03-018. Available at SSRN: https://ssrn.com/abstract=2105814 or http://dx.doi.org/10.2139/ssrn.2105814

Jan Jindra

U.S. Securities and Exchange Commission - Division of Economic and Risk Analysis ( email )

44 Montgomery Street
San Francisco, CA 94104
United States

Torben Voetmann (Contact Author)

The Brattle Group ( email )

201 Mission Street
Suite 2800
San Francisco, CA 94105
United States
415-217-1000 (Phone)

HOME PAGE: http://www.brattle.com

University of San Francisco ( email )

2130 Fulton Street
San Francisco, CA 94117
United States

Ralph August Walkling

Drexel University - Lebow College of Business ( email )

LeBow College of Business
Philadelphia, PA 19104
United States
(215) 895-4920 (Phone)
(215) 895-6119 (Fax)

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