Reverse Mergers and Earnings Quality

• In Event: Breakfast and Research Forum
  In Roundtable Session: Table 3: Auditing Reverse Merger Firms

Abstract

We test for differences in financial reporting quality between companies that went public through a reverse merger (RM) and other public companies. Moreover we test whether audit quality (Big 4), foreign incorporation, seasoned equity offering (SEO) play a role in the earnings quality of RM firms, above and beyond reverse mergers. We find that earnings management is pervasive at all RM firms, especially those that need to raise capital through an SEO after the merger. Though the presence of a Big 4 auditor does appear to less these issues, we find evidence of earnings management in both U.S. and international RM companies.

Authors

• Chu Chen, The University of Texas at El Paso

• Giorgio Gotti, The University of Texas at El Paso

• Kathryn Schumann, James Madison University