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

60 Pages Posted: 25 Jan 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: November 2015

Abstract

In this paper, we examine why Chinese reverse merger (RM) firms have lower financial reporting quality than U.S. IPO firms. We find that the financial reporting quality of U.S. RM firms is similar to that of matched U.S. IPO firms, but Chinese RM firms exhibit lower financial reporting quality than Chinese ADR firms. We also find that Chinese RM firms exhibit lower financial reporting quality than U.S. RM firms. These results indicate that the use of the RM process is associated with poor financial reporting quality only in firms from China, where legal enforcement and investor protection are weak. In addition, we find that compared with Chinese ADR firms, Chinese RM firms have weaker bonding incentives (as measured by CEO turnover-performance sensitivity) and poorer corporate governance. These factors in turn contribute to the lower financial reporting quality of Chinese RM firms. Overall, our results suggest that the less-scrutinized RM process allows Chinese firms with weak bonding incentives and poor governance to gain access to U.S. capital markets, resulting in poor financial reporting quality.

Keywords: reverse mergers, Chinese firms, financial reporting quality, bonding hypothesis, cross-listings

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 Weak Country Effect? (November 2015). Accounting Review, September 2016, Forthcoming; Singapore Management University School of Accountancy Research Paper No. 2016-40. Available at SSRN: https://ssrn.com/abstract=2721521

Kun-Chih Chen

National Taiwan University - Department of Accounting ( email )

85
Sec 4 Roosevelt Rd.
Taipei, 106
Taiwan

Qiang Cheng (Contact Author)

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

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