Importing Accounting Quality? The Case of Foreign Reverse Mergers

52 Pages Posted: 3 Dec 2012 Last revised: 12 Jan 2014

See all articles by Dan Givoly

Dan Givoly

Pennsylvania State University, Smeal College of Business

Carla Hayn

University of California at Los Angeles - Anderson School of Management

Ben Lourie

University of California, Irvine

Date Written: January 1, 2014

Abstract

The recent influx of foreign companies to the U.S. capital markets via reverse mergers, transactions that bypass the scrutiny given to IPOs, has raised concerns about the quality of financial reporting by the resulting firms. Using an array of proxies for reporting quality, we find that the reporting quality of these reverse merger (RM) firms, regardless of country of origin, is lower than that of their domestic industry peers and foreign cross-listed companies. However, the evidence is less conclusive regarding the alleged inferior quality of foreign RM firms relative to that of RM firms originating in the U.S. We also find that important determinants of the inferior reporting quality of RM firms are their lower audit quality and weaker external monitoring by the investing public. With few exceptions, investors appear to recognize this quality differential by tempering their reaction to accounting information reported by RM firms, and discounting these firms’ equity values relative to their non-RM industry peers. The findings have implications for investors, market regulators and auditors. They are also relevant for the discussion on the costs and benefits of harmonizing accounting standards and for the debate on the desirability of capital market stimuli in the form of relaxed reporting and disclosure rules.

Keywords: Reverse Merger, Accounting Quality, Financial Reporting, Accounting Standards

JEL Classification: M40, M41, K22, G5, M14

Suggested Citation

Givoly, Dan and Hayn, Carla and Lourie, Ben, Importing Accounting Quality? The Case of Foreign Reverse Mergers (January 1, 2014). Available at SSRN: https://ssrn.com/abstract=2183724 or http://dx.doi.org/10.2139/ssrn.2183724

Dan Givoly (Contact Author)

Pennsylvania State University, Smeal College of Business ( email )

305 Business Building
University Park, PA 16802
United States
814-865-0587 (Phone)
814-863-8393 (Fax)

Carla Hayn

University of California at Los Angeles - Anderson School of Management ( email )

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States
310-206-9225 (Phone)

Ben Lourie

University of California, Irvine ( email )

Irvine, CA 92697-3125
United States

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