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Market Failure and Reemergence: A Study of Chinese Firms Listed in the US

55 Pages Posted: 30 Sep 2016  

Randolph P. Beatty

University of Southern California - Leventhal School of Accounting

Hai Lu

University of Toronto - Rotman School of Management

Wei Luo

Peking University - Guanghua School of Management

Date Written: September 28, 2016

Abstract

Our study documents a “Lemons” market failure of Chinese firms listed in the US in 2011 and a subsequent rebound by 2013. Our tests reveal that there was little difference in ex ante observable characteristics of fraudulent and non-fraudulent Chinese firms listed in the US prior to 2011 while entrepreneurs appear to have known their type. We document substantial costs of dishonesty and the failure of traditional market signaling mechanisms such as auditor or underwriter quality. We also show a return of Chinese firms after US and Chinese regulatory intervention in 2013 although this intervention was insufficient to fundamentally change the character of this market. Importantly, we find that factors capturing ex post settling up costs such as North America sales and CEO’s US education reduced the probability of financial fraud. Our results support the importance of legal and regulatory institutions as a necessary condition for properly functioning capital markets.

Keywords: Chinese Firms, IPOs, Frauds, Lemons market, Information Asymmetry

JEL Classification: D81, D82, G15, G18, M41

Suggested Citation

Beatty, Randolph P. and Lu, Hai and Luo, Wei, Market Failure and Reemergence: A Study of Chinese Firms Listed in the US (September 28, 2016). Singapore Management University School of Accountancy Research Paper No. 2017-57. Available at SSRN: https://ssrn.com/abstract=2845180

Randolph P. Beatty

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States
213-740-4838 (Phone)

Hai Lu (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Wei Luo

Peking University - Guanghua School of Management ( email )

Room 461 Guanghua Building
Peking University
Beijing, Beijing 100871
China

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