Earnings Quality of U.S. Reverse Merger Firms

• In Event: Financial Accounting & Reporting 1
  In Paper Session: Financial Accounting & Reporting I

Abstract

This paper examines earnings quality of U.S. firms that access capital markets via a reverse merger transaction (RM firms) compared to those via the more traditional initial public offering (IPO firms) during the period from 1997 and 2011. We require a firm to be both incorporated and headquartered in the U.S. to be included in our sample, and match each RM firm with an IPO firm in the same industry and year with the closest total assets in order to mitigate confounding effects of legal regime, law enforcement, culture, organization type and size. To capture earnings quality, we use a battery of measures established in prior literature, including discretionary accruals, real earnings management, discretionary revenues, accrual estimation errors, and earnings persistence. Our measures have both convergent and discriminant validity and therefore appear to capture earnings quality fairly well. We find consistent evidence that following public listing, RM firms have lower earnings quality compared with IPO firms. Our evidence suggests that investors and other stakeholders should take into account the fact and consequences of the method that firms use to access capital markets in their investment decision making process.

Authors

• Yu Chen, Texas A&M International University

• Jared Scott Soileau, Louisiana State University