Does Foreign Company’s Shortcut to Wall Street Cut Short their Financial Reporting Quality? Evidence from Chinese Reverse Mergers

• In Event: Reverse Mergers

Abstract

We find that Chinese reverse merger (RM) firms exhibit lower financial reporting quality than U.S. RM firms, which in turn have poorer financial reporting quality than U.S. regular firms. These results indicate that the use of RM process is associated with poor financial reporting quality and the weak legal enforcement on Chinese RM firms exacerbates the problem. Moreover, the financial reporting quality of Chinese RM firms is inferior to that of other Chinese firms listed in the U.S. Compared with other Chinese firms listed in the U.S., Chinese RM firms exhibit lower bonding incentives and poorer corporate governance. Overall, the results indicate that the RM process provides foreign firms that exhibit low bonding incentives and poor governance with a “shortcut” to Wall Street, leading to poor financial reporting quality.

Authors

• Kun-chih Chen, Singapore Management University

• Qiang Cheng, Singapore Management University

• Ying Chou Lin, Missouri University of Science and Technology

• Yu-chen Lin, National Cheng Kung University

• Xing Xiao, Tsinghua University